Why Would Anyone Buy a Coal Plant Today? Presented by Mark Hall - PowerPoint PPT Presentation

Why Would Anyone Buy a Coal Plant Today? Presented by Mark Hall February 8, 2017 T RC has pr oudly suppor te d E UE C for mor e than 15 ye ar s

Agenda  The setting for coal-fired generation  Possible rationale for buying coal fired generation assets in today’s market  Additional considerations when making that investment decision 2

North America Market Conditions  The power generation market continues to experience significant turnover with the retirement of coal and nuclear assets and significant growth in utility scale renewables (principally wind and solar)  Electric production from gas now regularly exceeds that from coal with renewables rapidly gaining market share

North America Market Conditions (Cont) Power Market, US, Cumulative Installed Capacity (GW)  U.S. electricity demand has and Annual Power Generation (TWh), 2000–2025 been relatively flat and only modest growth is expected  Regional demand in the Southeast and Southwest will require more capacity as reserve margins shrink  Other US regions will see replacement of coal and nuclear with renewables and gas coupled with demand response  Regulatory drivers include tax credits and portfolio standards, air and water regulations Title: US Power Market Outlook to 2025, Update 2015 – Market Trends, Regulations, and Competitive Landscape Reference Code : PEPEC47068 Publication Date: November 2015 GlobalData

Setting for Coal  Natural gas price plus gas turbine efficiency advantage has propelled gas assets to a lower cost position in the supply stack  Substantial increase in installed renewables further depresses demand for coal  Future environmental requirements create additional economic pressure (ELGs, 316(b), PM 2.5 NAAQS, State CO 2 standards)

Coal Retirements Coal Capacity Retirements (MW)  Retirements peaked in 2015 with deadline for MATS compliance.  Significant retirements will continue for economic reasons without Clean Power Plan  State action to support renewables and reduce carbon emissions have potential to cause another step change in rate of retirements Source: UBS, Fanning the Flames of Retirement, May 20, 2016

So Why Would Someone Buy an Old Coal Plant?  Cheap capacity – some recently announced transactions are well below $300/MW • If you can get a reasonable capacity payment, cut OpEx and avoid too much dispatch, there is money to be made in short term  Run it till it dies – minimize CapEx  Get lucky – owning a portfolio gives you a better chance of getting a reliability must run type contract or similar bailout until other transmission or generation gets built • Severe weather like the polar vortex provides another opportunity to cash in

How are Buyers Dealing with Future Liabilities?  At some point, any given coal-fired asset will not be worth running or maintaining in ready-to-run condition  Quantifying that liability is not straightforward  Options that some market participants are employing • Cold Shutdown • Plant Demolition and Site Redevelopment • Bankruptcy 8

Cold Shutdown  In many respects this is the easiest strategy and preserves some future options  The activities typically include de-energizing equipment and systems, removal of any fuels, sale or transfer of spares. Goal is Cold, Dark and Safe  Caretaker staff or even just security  Opportunistic scrapping  Minimize taxes (requires approaching taxing authorities)  Wait • Possible repower scenario in the future • Possible improvement in steel scrap value  Don’t dig! The cardinal rule for most of these owners is don’t do anything to trigger a cleanup obligation  Costs – Moderate ongoing costs

Plant Demolition and Site Redevelopment  Less common than cold shutdown  Driver principally high redevelopment potential • Plants in urban areas with expensive real estate and waterfront property or unique infrastructure  High scrap value for steel historically allowed for plants to be demolished at near a net $0 cost but average cost is around $15 million today  Dealing with asbestos, lead paint and PCBs can be significant part of the cost  Outside of areas with high potential for redevelopment, structures often removed to grade but no subsurface work occurs • Plants with on site CCR impoundments will have ongoing monitoring obligations  A number of power plants demolished in past decade (TRC involved in 32)

The Bankruptcy Strategy  Private equity has been setting up LLCs for plants and portfolios for years with expectation that if market conditions dictate they could shut down and walk away.  My limited survey of a few law firms is that this can be very tricky to execute.  Need to be aware of state and local regulations that could effect the success of this strategy.  Should have an alternative plan and understand the potential costs for those alternatives. • Demolition • Cold Shutdown

Initiatives Around Transforming Cold Sites, Accelerating Redevelopment and Demolition  Power plants have unique infrastructure, on reasonably large sites  Towns and Economic Development Authorities would love to see these sites providing jobs and generating tax revenues  The biggest impediment has been liability management  PA Department of Commerce and Economic Development example

Questions? Mark Hall P: (630) 292-3914 | E: MHall@trcsolutions.com