A new report assesses the credit risks that power plants face from the global transition to an economy with lower carbon dioxide emissions and finds that some U.S. coal plants are still exposed to those risks, despite Trump administration efforts to roll back CO2 reduction rules.
Transition risk varies widely because every power plant is unique, but coal plants that sell into a spot market are the most exposed, especially if they are in markets where renewable energy is growing, says the report from Moody’s Investors Service.
- Political support for incumbent generators could result in subsidies that could mitigate or delay the transition risk for coal plants. But in the U.S., they would, in many cases, be working against state policies and larger market dynamics, the report says.
Coal-fired plants are at risk globally as the world transitions to an economy with low carbon dioxide emissions. Those risks vary by jurisdiction and by the particular characteristics of the plants and the markets in which they operate, according to the Moody’s report.
“Despite the shift in U.S. policy at the federal level, projects in the U.S. will face varying degrees of carbon policy risk at the state level,” the authors of the report say. For instance, prescriptive policies, such as state renewable portfolio standards, can expose existing fossil fuel plants to carbon transition risk.
Fully contracted renewable energy projects have the least transition risk while older, inefficient merchant coal plants are likely to suffer disproportionately from the financial effects of carbon transition such as lower wholesale prices, the cost of carbon credits, lower capacity factors and increased operating or capital costs, according to the report.
Even though some of those coal plants may receive higher capacity revenues as renewable penetration grows, those revenues might not be sufficient to compensate for lower energy prices and volumes, Moody’s says.
In the United States, some coal-fired generation may have gained additional time because of the proposed U.S. withdrawal from the Paris Agreement on climate change and because of the proposed repeal of the Environmental Protection Agency’s Clean Power Plan, the report says.
But as renewable energy penetration continues to grow, Moody’s expects wholesale power prices to continue to decline, which is credit negative for all merchant generators. Older and inefficient carbon-intensive plants could be in a position where they are only able to run profitably for increasingly short periods of time, Moody’s says.
The Department of Energy's Notice of Proposed Rulemaking on ways to compensate baseload generation, now under consideration at the Federal Energy Regulatory Commission, may provide some relief to existing coal plants, but the report notes that the PJM Interconnection compensates plants for reliability through its capacity market and that “has not yet translated into significant revenues for coal-fired generation.” The report says it is “unclear” if additional revenues from capacity payments can fully compensate for lower volumes, prices and additional operating or capital costs in the future.
In addition to policy and regulatory uncertainty and demand substitution risk, the report also assesses the risk from disruptive technologies. The declining costs of renewable energy, wind and solar power in particular, are being driven by economics, rather than just subsidies or mandates, the report says. In addition, Moody’s expects the growth of energy storage will be credit negative for conventional power generation plants, because it will allow renewable generation to compete on an equal footing with conventional plants. And renewables combined with energy storage may be able to participate in capacity markets, which would further reduce capacity revenues for existing power generators.
Privately owned coal generators such as Homer City Generation in Pennsylvania have already gone bankrupt, and large generators such as FirstEnergy’s merchant generation subsidiary are now facing bankruptcy.
“FirstEnergy is dealing with declining demand and a wall of debt maturities,” Tim Hynes, head of distressed research at Debtwire, a distressed debt research firm, told Utility Dive.
“The rest of the world is trying to phase out coal, so there are going to be liabilities from increasingly cheap renewables,” Hynes said.
One of those liabilities could be Murray Energy, the largest privately owned coal mining company in the U.S. Robert Murray, the company’s CEO has said that if FirstEnergy goes under, it could take Murray Energy with it. FirstEnergy accounts for 10% to 20% of Murray Energy’s coal sales, Hynes said.
Efforts to shore up ailing coal plants could “slow down the rate of decline, but it won’t stop it as long as the cost of wind and solar power continues to come down,” Hynes said. There are no economic reasons to keep old, inefficient coal plants running; “it is all political,” he said.