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

Presented by Mark Hall

February 8, 2017

Why Would Anyone Buy a Coal Plant Today?

T RC has pr

• udly suppor

te d E UE C for mor e than 15 ye ar s

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• 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

Agenda

• 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

North America Market Conditions (Cont)

Power Market, US, Cumulative Installed Capacity (GW) and Annual Power Generation (TWh), 2000–2025

Title: US Power Market Outlook to 2025, Update 2015 – Market Trends, Regulations, and Competitive Landscape Reference Code : PEPEC47068 Publication Date: November 2015 GlobalData

• U.S. electricity demand has

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

• 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 CO2 standards)

Setting for Coal

Coal Retirements

Coal Capacity Retirements (MW)

Source: UBS, Fanning the Flames of Retirement, May 20, 2016

• 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

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
• pportunity to cash in

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• 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

How are Buyers Dealing with Future Liabilities?

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

• 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)

Plant Demolition and Site Redevelopment

• 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

The Bankruptcy Strategy

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