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New gas build, coal retirements could make PJM next market with distressed power prices

A flood of new, efficient gas-fired plants is going to put downward pressure on PJM power prices, pushing more coal plants to the brink

The PJM Interconnection could be the next wholesale power market to see distressed power prices, leading to a fresh wave of coal plant retirements, according to an analysis by Moody’s Investors Service.

Coal is already under pressure in PJM, but with 22.7 GW of new, efficient gas-fired combined-cycle gas turbines (CCGTs) expected to come online in the next three to four years, PJM could be the next wholesale power market to see distressed power prices, says Toby Shea, vice president and senior credit officer at Moody’s.

“As more gas comes in, someone has to leave,” said Shea.

Hydraulic fracturing has brought a flood of new natural gas to the market, pushing down prices. In January the Energy Information Administration reported that 2016 gas prices were at their lowest levels in nearly 20 years, with spot prices averaging about $2.49 per million British thermal units (MMBTU) at Henry Hub, where the national gas price benchmark is set.

Gas prices have also fallen in the futures market, declining as much as 25% over the past couple of months to $2.98/MMBtu on the New York Mercantile Exchange.

Looking even further out, gas future contracts to January 2019 average about $3.28/MMBtu with a range between $2.84/MMBtu and $3.44/MMBtu. And forward looking estimates peg the price of gas at about the $3/MMBtu.

Cheap gas has prompted developers to build new gas-fired plants that they believe will be able to undercut existing plants. In a February report UBS noted there are 15 GW of CCGTs under construction in PJM with another 4 GW expected to clear the RTO’s upcoming capacity auction.

PJM real-time electricity prices (PJM West) track trends in the natural gas market (TETCO-M3), with more variation in the summer months.
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New gas-fired generation pushes down spot prices, but new entrants also serve to lower prices in PJM’s annual capacity auction, in which entrants bid to lock in prices three years in the future.

As more gas plants enter the market, they put increasing pressure on coal plants. Last October, Public Service Enterprise Group said it would retire 1.2 GW of PJM coal plants this year.

Right now those coal plants are providing price support in PJM, but if they close PJM could join California and Texas as the next market with distressed power prices, Shea said.

For coal plant operators, lower power prices mean the plants run less frequently. In Moody’s analysis, about 10 GW of coal plants in PJM have a capacity factor of 43% and 12 GW have a capacity factor of 58%. A coal plant is likely to close if its capacity factor falls below 40%, Shea said.

According to that analysis, a substantial portion of PJM’s coal plants are running close to the edge, and a $7/MWh drop in on-peak power prices could force them to retire/

Current market prices in PJM are about $47/MWh, so coal, with a cost of about $40/MWh, is still in the money, Shea said, but it is at a disadvantage compared with the $29/MWh cost of an efficient gas-fired plant.

In Moody’s analysis, the economics of baseload operation are not much more encouraging, with market prices around $37/MWh and coal costs at $34/MWh while efficient gas’ costs are around $25/MWh.

Forward prices in PJM are now running in a range between $36/MWh and $44/MWh for all-in (energy and capacity) baseload power and between $46/MW and $56/MW for all-in mid-merit plants.

On the positive side for coal plant operators is the fact that coal prices are falling. Delivered coal fell by about $5/MWh between 2012 and 2016, but Shea notes that the outlook is not that simple. Coal prices could continue to fall, but not the cost of transporting the fuel. That could put plants further from coal mines, such as those in New Jersey or Maryland, at a disadvantage.

As coal plant operators adapt to these realities, some could look to cutting costs to prolong the life of their plants, but that also involves risks.

“If you cut costs and no one else does, that’s great,” Shea said, but if everyone is cutting costs it could lead to a downward spiral and “the market could crater.”

Some coal plants may find a new lease on life by converting to burn gas, but most coal plants in PJM, nearly 75%, are not close enough to a gas pipeline to make that feasible.

Other plants at risk

Coal is not the only generation source threatened by low gas prices. Nuclear plants are also at risk. In Moody’s analysis some small nuclear plants are already out of the money in PJM with a cost of $44/MWh against a baseload market price of $37/MWh. Large nuclear plants fare a little better with costs of about $30/MWh.

Gas plants also are at risk, though Shea says that inefficient gas plants will likely be able “to live off their capacity payments.”

Even the new gas plants that are coming online could face pressure. When they were first proposed they were built on the economics of trapped gas, which kept gas prices low. With more gas pipelines taking gas out of the Pennsylvania’s Marcellus shale area, those prices are likely to rise, altering the original economics.

None of these changes are going to take place overnight, Shea said, and much can change over the next few years. But, he added, current environment coal plants in PJM are a “slow moving train wreck."

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Filed Under: Generation Efficiency & Demand Response Regulation & Policy
Top image credit: Flickr user Graf Spee