Power Producers Should Cheer Coal's Closing Time

October 9, 2017, 9:07 pm | Admin

Et tu, Texas? Barely a week after Energy Secretary Rick Perry pitched his latest plan to revitalize the coal industry, the biggest power company in his home state announced it was shutting down one of the largest coal-fired power plants there.

In fairness, Vistra Energy Corp. has been expected for quite a while to close several of its older coal-fired plants in Texas. The 1,800-megawatt Monticello plant, about 100 miles east of Dallas, began operating the year President Richard Nixon resigned and will shut down in January. Still, Vistra's decision to move forward shows the multiple forces acting on the Texas power market will make it difficult to keep these plants open by regulatory fiat.

Even as demand for electricity in Texas has kept rising -- in contrast to much of the U.S. -- and hot summers have sparked big peaks on some days, power prices have been on a prolonged slide:

The primary causes are cheap natural gas and a rising share of wind power.

The former is a nationwide phenomenon but particularly pronounced in Texas because the fracking boom for oil in the Permian basin throws off a lot of associated gas, too, for which producers will take pretty much any price. Natural gas priced at the Waha hub in West Texas has traded at an average discount of 11 percent to the benchmark natural gas futures price over the past year, according to data compiled by Bloomberg. This suppresses power prices overall, as natural gas-fired plants tend to set the market price overall in Texas. Cheap gas also takes market share from coal.

Wind power, meanwhile, is especially pernicious because, once built, a turbine's fuel costs are zero -- a powerful suppressanton the market when the wind is blowing.

Demand-response programs also play a growing role in Texas, note analysts at Tudor, Pickering, Holt & Co. These encourage large users of power -- primarily commercial and industrial sites -- to curb consumption at times of high stress on the grid, such as on very hot days with little wind, and thereby avoid very high charges. The more they do this, the less likelihood that demand will hit the high levels justifying peak prices -- and therefore less of a windfall for generators. 

The upshot is that the Monticello plant's economics have collapsed:

The thing is, while this is obviously bad news for coal mining -- especially in Wyoming -- power producers should be jubilant.

With natural gas futures flat as far as the eye can see, and more wind turbines being built, the fastest route to boosting power prices in Texas is closing old plants, mainly coal-fired ones. Vistra is expected to shut down more 1970s-vintage plants, with Martin Lake and Big Brown -- both also in East Texas -- likely candidates. This would help to clear the state's glut of capacity.

In a recent report, Bloomberg New Energy Finance identified about 4,500 megawatts of coal-fired plants at risk of closure in Texas. If they all shut down, then by the early 2020s, the state's "reserve margin" -- the buffer of spare capacity needed to reduce the risk of blackouts -- could slip below the threshold regarded as safe, or 13.75 percent of peak demand:

Vistra would gain from this as higher power prices boosted margins at its remaining plants, including the Odessa gas-fired project it just bought from Koch Industries Inc. NRG Energy Inc., currently in the process of stripping itself back to a largely Texas-focused power provider, could also gain.

One wildcard is renewable energy; higher penetration of wind-power or solar projects helps to offset some of the support provided by coal-fired plant closures. The other wildcard is policy: If anything like Perry's plan gets enacted in Texas, then some of that spare capacity could well keep on running.


Last modified on October 20, 2017, 9:11 pm | 1189