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Why Coal Plants Retire: Power Market Fundamentals as of 2012

Posted by Content Coordinator on Tuesday, February 21st, 2012

ANALYSIS GROUP, INC.

Power companies in the U.S. have announced a growing number of retirements of coal-fired power plants over the past 12‐14 months. While not unexpected, recent announcements have sparked debate over the causes of these business decisions, with some pointing to regulations issued by the U.S. Environmental Protection Agency (“EPA”) as the primary reason. Putting aside the political context of the current debate, a closer examination of the facts reveals that the recent retirement announcements are part of a longer‐term trend that has been affecting both existing coal plants and many proposals to build new ones. The sharp decline in natural gas prices, the rising cost of coal, and reduced demand for electricity are all contributing factors in the decisions to retire some of the country’s oldest coal‐fired generating units. These trends started well before EPA issued its new air pollution rules.

In general, the owner of a coal‐fired power plant (or of any generating facility, for that matter) may decide to retire the plant when the revenues produced by selling power and capacity are no longer covering the cost of its operations. While sometimes these decisions are complex, they essentially can resemble the basic choices that households face, for example, when they have to decide whether making one more repair on an old car is worth it: often, making the repair is more expensive and risky than the decision to trade in that car and buy a new one with better mileage and other features that the old car lacks.

These plant‐retirement decisions thus turn on these economic fundamentals: can the plant produce power at electricity prices that allow the owner to cover its operating and investment costs, including the ability to earn a reasonable return from the production and sale of electricity? It is these other considerations, beyond EPA’s clean air rules, that have been influencing recent coal plant retirement decisions.

Download full report (PDF): Why Coal Plants Retire

About the Analysis Group
www.analysisgroup.com
“Analysis Group provides economic, financial, and business strategy consulting to law firms, corporations, and government agencies. Through our work in thousands of cases across multiple industries, we have built a reputation for excellence by providing fact-based, thoughtful interpretation of complex legal and business issues.”

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