As One Marginal Power Plant Retires, Another Huffs and Puffs

 | Jan 11, 2013 | 6:00 PM EST
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Coal's long-term fundamentals are coming into focus. A traditional fuel for older power plants, steam coal will come under increasing pressure, as more power plants than expected exit the market.

In many ways, coal-fired power plants are similar to nuclear plants. Their back ends use similar technologies of steam turbines, condensers, massive generators, transformers and switchyards. Their efficiencies are hopelessly constrained by the stubborn laws of thermodynamics; it is difficult for them to reach the mechanical efficiencies of most modern gas turbines. Coal and nuclear power plants produce waste products that have become an environmental and economic challenge.

With the advent of deregulated power markets, efficiency has become a critical success factor. The more efficient a power plant becomes, the greater the gross margin. Inefficient plants cannot compete and must retire or find other revenue sources.

New Environmental Protection Agency regulations simply accelerate the inevitable; marginal coal plants will become uneconomic. New regulations will make for cleaner air but they will also cause coal plants to become less efficient.

Utilities will have to decide if it is worth keeping less efficient plants in the fleet. Not only will they be faced with new capital expenditures, their capex will struggle for returns. Like the nuclear industry, coal utilities may conclude the potential returns are inadequate and force their older units to exit the market.

The other critical success factor is the delivered cost of fuel. When combined with efficiency, fuel costs will make or break a power plant's economics.

For steam coal, fuel costs include the additional expenses of handling fly ash, the residue that remains. Depending on the quality of the coal, fly ash volumes can be substantial.

Some ash is recycled. According to Power Engineering, up to 35% of the coal combustion byproducts from Southern Company's (SO) coal plants are used in concrete, road building, and in other beneficial ways. But more than half of it is sent to disposal facilities. In many cases, the same rail cars that deliver coal are rehired to ship ash to waste disposal sites.

Some utilities, like Southern and the Tennessee Valley Authority (TVA), avoid shipping costs and use the land surrounding their power plants. They store mounds of waste ash and combustion products in holding ponds. Most of the time, this method is safe and cheap, but there have been some spectacular accidents.

According to Chemical and Engineering News, December 2008, a sea of coal-ash sludge broke through a dam at a TVA coal-fired power plant in eastern Tennessee. The reservoir covered 84 acres and was one of the plant's three holding ponds for ash. It released more than half its waste, some 5.4 million cubic yards of ash, which flowed through farmland and into the Emory and Tennessee rivers. No one was killed, but once spread, the ash covered roads and an area of more than 275 acres in a 6-foot-deep mass of sludge containing heavy metals like arsenic, lead, mercury, selenium and other toxic elements.

TVA's accident is symptomatic of a little-recognized problem caused by growing efforts to reduce air pollution from coal-fired power plants. No matter how effective air emission technologies become, "clean coal" still comes with pollution, which must be managed. The tougher air pollution controls become, the higher the ash content and the higher the production costs and lower the plant's economic efficiency.

There are more than 1,000 similar dumps spread across the nation. When there is a large quantity of toxic materials, and a spectacular accident occurs, it attracts regulators and new regulations.

The EPA is now proposing to issue new rules. They plan to regulate the safe disposal of coal ash from coal-fired power plants under the nation's primary law for regulating solid waste, the Resource Conservation and Recovery Act. The proposed rule is known as the Coal Combustion Residues Rule. In 2012, EPA put CCR on the back burner as it wrestled with the rulemaking process.

Now the EPA is being pressured by environmentalists and other concerned parties to act. There are threats of lawsuits and pressure from Congress. It appears the regulator may act soon. The new rule will likely cause fuel costs to escalate for power plants, which will impact their competitive advantage.

Particularly after the rule is enacted, more than expected coal-fired power plants will become marginalized and they will consider retirement. The problem is, as one marginal unit exits, another is created.

The system will ultimately reach equilibrium. Only the best in breed will survive to produce adequate margins. Until then, companies like Peabody Energy (BTU), Alpha Natural Resources (ANR), Arch Coal (ACI) and CONSOL Energy (CNX) may see lower than expected revenue from domestic utilities.

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