Earlier this week FirstEnergy, the eighth largest U.S. power producer, announced that it will shut down two coal-fired power plants in Pennsylvania by October of this year. According to the company, new environmental regulations, particularly MATS, were a major reason behind the decision. But Hatfield’s Ferry (HF), the plant which made up over 85 percent of capacity being shuttered, is efficient, can reap economies of scale (at 1.7 GW it is a relatively large plant) and has the most expensive bit of the environmental kit (scrubbers) already installed. In other words, HF is precisely the sort of plant that would have little trouble complying with MATS. So why might FirstEnergy be retiring this plant?
Saturday, July 13, 2013
Sunday, June 10, 2012
Electricity is neither a Giffen good nor a Veblen good but it still violates the law of demand. This was reinforced last summer in Texas, the hottest on record, when wholesale electricity prices reached nearly 30 times the normal price with no appreciable dent in demand. The Electric Reliability Council of Texas, the wholesale market operator, scrambled to procure the necessary capacity to keep Texans’ air-conditioners humming and barely avoided having to impose rolling blackouts. It could do so because “reserve margins” (electric sector jargon for excess capacity) in Texas at the time were adequate to avoid any shortfall in supply. Signs now point to reserve margins being in decline. If current trends continue, by 2016 the region’s reserve margin will be less than half its current reliability target of 13.8 percent (of total peak demand). What can Texas do to reverse this trend?
Tuesday, March 27, 2012
In an energy landscape full of oddities, U.S. producers salivating at the prospect being able to export natural gas at European or Asian prices is the latest. A supply glut along with record low natural gas prices domestically have led at least three U.S. liquefied natural gas (LNG) terminals – Sabine Pass, Freeport and Lake Charles – to apply for export licenses. Several others are in various stages of doing so. It has given rise to a national debate over the impact of exports with at least one lawmaker proposing to ban exports of natural gas from the U.S. (Under the Natural Gas Act of 1938 any import or export of natural gas requires approval by the Department of Energy.)
Over 40,000 “Friends of Coal” in Kentucky display their support for coal on their vehicles making it the bestselling special interest license plate in the state. Alas, the wholesale electricity market and coal plant economics are not among them. The double-whammy of falling electricity prices and rising production costs has reduced profit margins to the point where many coal-fired power plants are no longer making any money from selling electricity. Last month, Great River Energy, Minnesota’s second largest electric company, decided to mothball its newly built Spiritwood coal-fired generating station citing dismal economics. According to the company the plant would have sold electricity at a loss most of the time.
There are many reasons why coal plants find themselves in this quagmire.
Just, non-discriminatory, and economically sound are three qualities electric utilities often strive to achieve when setting electricity rates. Assuming they are reasonably successful, the rates U.S. residents actually pay for electricity indicate that these qualities can translate into vastly different monthly bills depending on geography – from just over $40 in Maine to nearly $170 in the state of Hawaii. From levies to fund local public policies to weather, a diverse set of factors contributes to the differences. Generation and transmission costs, however, are by far the biggest drivers of price divergence.
In 2000, The Economist, noting rising natural gas prices, concluded that “natural gas will be a seller’s market for some time to come”. It was short-lived. Natural gas prices doubled or halved in single 12-month periods at least five times in the decade to 2010. Historically, prices have been much more boring: for nearly seven decades till the lifting of wellhead gas price controls in 1989, they changed, on average, less than 10 percent a year. That changed in the noughties when highly volatile gas prices became the norm. So much so that they claimed several victims: Amaranth Advisors, a hedge fund, closed after losing almost $7 billion betting on rising natural gas prices in one of the largest trading losses; MotherRock, one of the biggest traders of natural gas derivatives on Wall Street, shut down after running up huge losses.
Burning River Pale Ale, a beer, immortalizes June 22, 1969, when Cleveland’s polluted and lifeless Cuyahoga river spontaneously burst into flames. The incident galvanized national political support for several environmental initiatives including amendments to the Clean Air Act (CAA) and the creation of the Environmental Protection Agency (EPA) in 1971. As part of CAA requirements, EPA recently proposed several rules that will affect power plants directly. The electric industry is concerned that power plants, unable to comply with the rules, will have to shut down. Old, inefficient, and marginal contributors to the grid most likely will. For the rest, economically sound options exist to comply in a timely manner and continue generating electricity. Compliance related economic activity could also play a macroeconomic role boosting demand and raising employment.