Will lower cost renewables and natural gas accelerate PacifiCorp's generation transition?
A new study shows 20 of the utility’s coal units may not be cost-competitive.
New data adds to the growing evidence that new renewables are a better buy for utilities than old coal.
The generation from 11 PacifiCorp coal plants costs more than it would for the utility to buy power in energy markets. The generation, on a net present value (NPV) basis, from 12 of PacifiCorp's coal units costs more than the NPV for solar PV power purchase agreements (PPAs). And wind PPAs beat the generation from 20 PacifiCorp coal plants.
These are conclusions from a June 20 Energy Strategies study for Sierra Club, which used data from the utility's own 2017 reports to the Federal Energy Regulatory Commission (FERC) and the U.S. Energy Information Administration (EIA).
Based on these findings, "it is reasonable to consider whether the continued operation of the company's coal units is warranted if lower cost resource options exist," Energy Strategies concluded. This is particularly the case because costs for generation from wind, solar and natural gas continue to drop while PacifiCorp is paying more per-MWh to keep its aging coal fleet.
PacifiCorp is making major strides toward addressing this concern, according to spokesperson Bob Gravely. Its most recent planning documents show much of the coal fleet scehduled for retirement in the late 2020s and 2030s and significant additions of renewables.
But Sierra Club remains unsatisfied. It argues the utility is unnecessarily imposing costs on customers and the environment by keeping its coal plants in service instead of developing a comprehensive approach to replacing them with the renewables it is building.
The low-cost explosion
Since 2009, the cost of wind generation has dropped 38%, the cost of utility-scale solar has dropped 77%, and the cost of battery storage is down 79%, a March Bloomberg New Energy Finance (BNEF) study found. Newer data show both wind and solar costs dropped 18% in just the first half of 2017, according to BNEF. Battery prices are forecast to fall another 67% by 2030.
An explosion of 2018 data suggests the trend could be accelerating. In January, Xcel Energy Colorado revealed bids into its 2016 all-resource solicitation. The median bid for wind-plus-storage projects was $21/MWh. The median bid for solar-plus-storage was $36/MWh. In a March 1 update, 58% of the bids were unchanged and 26% were lower, spokesperson Mark Stutz emailed Utility Dive.
These prices for utility-scale renewables, for delivery in 2022, were lower than those previously seen but not departures from a trend toward prices competitive with fossil fuel generation. On June 1, NV Energy filed for approval of a contract for a 300 MW solar project at $23.76/MWh.
But the most important numbers were reported in July by the EIA: all-in prices for renewables generation are lower than just the fuel costs for natural gas generation, $23.11/MWh, and coal generation, $28.16/MWh. This shows that the cost of building renewables projects, which have zero fuel costs once they are in service, is lower than the cost of supplying fuel to existing coal and natural gas plants.
Saving money on renewables — even with conservative estimates
PacifiCorp's cumulative coal generating capacity of 5,975 MW provides 59% of the generation used to meet load, the Sierra Club paper reports. But those plants' cost-competitiveness is being eroded.
Low cost renewables and natural gas are a major factor, as are costs incurred to keep older plants in compliance with environmental regulations. The units studied were, on average, 43 years old, Energy Strategies principal Jeff Burks told Utility Dive. "No unit was less than 30 years old."
In addition, utility loads are flattening, Burks said. "Some units are still operating at a capacity factor over 80% but a significant portion are operating in the 60% to 70% capacity factor range. That spreads a smaller number of MWh across the fleet, increasing the per-MWh cost," he said.
Sierra Club commissioned Burks to compare the operating cost for supplying energy from 22 PacifiCorp coal units with energy supplied by wind, solar or energy markets. Two of the 22 units still have cost-competitive operating costs. The NPV of the cost of running the other units to the end of their depreciable life was measured against the NPV of replacing them with alternatives in 2022.
The market beat 11 coal units with a combined 2,730 MW capacity. Switching to lower cost resources could save the utility $680 million, the paper reports. Solar beat 12 coal units with a combined 3,173 MW capacity. That switch could save $700 million. And switching out the 20 coal units that wind beat could save PacifiCorp ratepayers $2.8 billion.
Energy Strategies also used the levelized cost of energy (LCOE) to compare the coal units and replacement resources. The coal units' LCOEs ranged from $26.72/MWh to $50.43/MWh. Market prices estimated to be in the $29/MWh to $34/MWh range beat as many as 16 of the units, the paper shows.
Solar's LCOE was assumed to be $38.55/MWh, again beating 12 coal units. Wind's assumed LCOE of $27.56/MWh again beat 20 units.
"We used very conservative assumptions for wind and solar that were significantly and starkly higher than the bids in the Xcel Colorado and NV Energy solicitations," Burks said.
The findings raise "a fundamental question of whether some of PacifiCorp's coal units are in fact least cost resources," the paper concludes.
Limits and disputes
The study is not "definitive" but "indicative," Burks said. It "offers information and guidance for the evaluation of PacifiCorp's resource portfolio in its next integrated resource planning." More detailed modeling could consider factors like market conditions and timing and locational factors that impact dispatch decisions.
Utility integrated resource plans (IRPs) use exhaustive scenario planning that includes a full range of operational and financial considerations to identify optimal long-term resource portfolios, PacifiCorp's Gravely emailed Utility Dive. The conclusions are based on "our obligation to provide electricity on a least-cost, least-risk basis."
Many stakeholder studies "are quite limited in scope and do not adequately consider system reliability and the actual cost of providing electric service for customers," he added.
"We are following regulatory principles regarding the treatment of unit-specific financial information that go back to the founding of wholesale energy markets."
The Energy Strategies analysis was limited because PacifiCorp limited access to data, Burks said.
Still, the study "raises the question of whether PacifiCorp is giving its customers the best deal possible on energy," Sierra Club Communications Director Marta Stoepker told Utility Dive.
The paper might have answered more questions if the utility had allowed IRP proceeding stakeholders like Sierra Club full access to its data, Stoepker said. "Instead, it is saying our report is flawed, but it is only flawed because we don't have access to their data."
PacifiCorp should also make its data public because "customers have the right to know how their money is being used and shareholders deserve to know what they are investing in." she added.
PacifiCorp is "protecting market sensitive power cost information and would do the same for any power plant regardless of its resource type," Gravely said.
Access to data is limited because it could be "represented out of context and politicized," he added. "We are following regulatory principles regarding the treatment of unit-specific financial information that go back to the founding of wholesale energy markets."
The concern, Burks said, is that PacifiCorp tends to "hardwire" existing coal units into its resource portfolios. The "logical next step" is to include the units identified as not cost-competitive with alternatives in "early retirement modeling scenarios PacifiCorp runs during its 2019 IRP process."
The May 1, 2017 PacifiCorp IRP calls for closure of 12 of the units identified by Energy Strategies as uncompetitive by 2030 and total coal capacity will be reduced 3,600 MW by 2036, Gravely said.
The IRP also eliminates new natural gas generation capacity, due to plans to add "lower-cost renewables," Gravely said. That will begin with PacifiCorp's $3.5 billion Energy Vision 2020 investment, which includes 1,311 MW of new wind capacity and 999 MW of repowered existing wind capacity.
PacifiCorp plans to add over 2,700 MW of new wind and 1,860 MW of new solar by the end of the 2036 planning period, the IRP reports.
"It is not about just turning the plant off and walking away, it is about building a plan to transition away from coal."
Communications Director, Sierra Club
Sierra Club's Stoepker applauded PacifiCorp's efforts at building renewables, but said the utility has not made it clear how they fit into its overall resource mix. "It would seem to make the coal plants even less economic," she said. "What is the longer-term strategy?"
The Sierra Club objective is to "move coal off the grid," she added. "It is not about just turning the plant off and walking away, it is about building a plan to transition away from coal."
Doubts and solutions
Both Gravely and Burks acknowledged a complete transition play would require a deeper analysis.
Such a study should include at least three key considerations, Brattle Group Principal Metin Celebi told Utility Dive. First, Energy Strategies assessed individual plants, but integrated planning addresses resources as a portfolio.
"The retirement of a few thousand MWs in a portfolio could significantly change a utility's need for new resources," Celebi added. "Utilities also specifically require 'capacity' resources to meet peak demand needs."
The study examines impacts of energy changes in 2022, he said. That works while there is surplus peak demand capacity in the portfolio, he acknowledged. But eventually there may be a need for new capacity and the replacement costs could be significant.
Energy Strategies reported that "it is not beyond reason to assume [the NPV savings provided by the replacement resources] could be used to mitigate capacity replacement costs." Celebi said only a more comprehensive study would show "how big the need for capacity would be after the surplus is exhausted."
After energy, capacity is probably the most critical service a generation resource provides, Rocky Mountain Institute (RMI) associate Alex Engel acknowledged. Engel co-authored landmark RMI work on valuing utility energy portfolios.
"The paper shows alternatives put some of the coal plants way out of the money on energy," he told Utility Dive. Only more analysis could be conclusive about capacity.
"But there are other options to obtain capacity and other services," Engel said. "There are capacity markets, or batteries, or other distributed energy resources."
A third factor to be considered is the cost of accelerating coal plant decommissioning, Celebi said. "If a plant was scheduled to be decommissioned in 2035, but is retired in 2022, there is a time value of money that affects the economics."
Burks said his analysis was not about coal plant retirements, but about comparing NPVs and LCOEs.
But moving coal, especially uneconomic coal, "off the grid" could mean making costly assets "not used and useful" and ineligible for cost recovery, Celebi said. "To prevent that from being a barrier, stakeholders can agree on an accelerated depreciation schedule."
The recent federal income tax reduction has created financial head room for utilities, he said. They can keep customer rates unchanged because the increased depreciation costs are balanced by lower taxes.
Another option is securitization, Celebi said. The utility would sell long-term, low-risk bonds secured by utility-owned assets to investors. The utility could use the cash from the bond sale to offset the loss from writing off the coal asset.
"It can be complicated to decide the best way to deal with unrecovered costs for retiring coal plants, but it can be dealt with," Celebi said.
"Many utilities are thinking about renewables as an option, but that option needs to be examined realistically, with consideration of the risk factors. It is not an easy analysis."
Principal, The Brattle Group
Undepreciated assets on a utility's books are a very real constraint on moving to cheaper resources, Engle agreed. "A for-profit company is unlikely to be willing to write off a huge asset without compensation," he said. "Using securitization to write off a coal plant and replace it with cheaper resources is reasonable and has been shown to be viable."
Celebi said utilities have been working for some years on how to plan the economic retirement of existing coal units. Some utilities are working more aggressively than others, depending on local policy and access to low cost replacement resources, he added.
A new factor in their analyses is that new natural gas is no longer the replacement resource of choice, Celebi said. "Many utilities are thinking about renewables as an option, but that option needs to be examined realistically, with consideration of the risk factors. It is not an easy analysis."
The Energy Strategies paper is a "legitimate" beginning of that analysis, RMI's Engel said. "It could help regulators understand that PacifiCorp needs to do the more in-depth analysis."