Utilities Adjusting to New Economic and Regulatory Realities

Location: New York

Date: 2013-02-04

Georgia Power’s decision to retire 2,000 megawatts of fossil-fired generation is becoming commonplace. Those units are expendable given the current environmental rules and the cost of natural gas.

Altogether, the utility will be shedding 15 coal and oil facilities while nationally, 42,000 megawatts of older coal-fired plants will go, many by 2015 and all by 2020. Rules and regulations handed down at the federal level are the catalyst for such actions -- dictates that are affecting such pollutants as mercury, sulfur dioxide and carbon dioxide. And while the nation’s major coal-burning utilities are objecting to the aggressive nature of those rules, they will readily acknowledge that natural gas is today a cheap and clean alternative.

“They are faced with economic choices that are becoming untenable,” says Craig Dowdy, a partner with McKenna Long in Georgia. “Now, with the pricing of natural gas, it has become a good option. I would still advise utilities to have diverse portfolios, which will be their continued plan as will be for their regulators. It adds to the ultimate reliability.”

Georgia Power is a subsidiary of Southern Company. Five years ago, the parent’s fuel mix consisted of 70 percent coal but now it is 47 percent. Odds are that the coal configuration will fall further unless carbon capture and sequestration technologies are to become commercialized. What then does that entail for utilities that may come to rely on natural gas?

Prices would be expected to rise while the nation would have to invest more in pipelines. Those gas-dependent utilities would then have to hedge that risk by entering into long-term fixed pricing contracts while others may want to invest in or own natural gas wells.

After World War II, the United States was expanding its utility infrastructure and was building coal-fired power to meet the nation’s energy demand. Today, more than 500 coal plants supply about 40 percent of the electricity here. But that is coming from an asset base in which 35 percent of the facilities are older than 40 years, which has exceeded their anticipated lifespan.

Energy Transition

The White House strongly favors the energy transition and has thus been laying the foundation for the growth of clean tech and green fuels. As for Southern Company, it is investing in a number of new projects that range from biomass to large scale solar to carbon capture used for enhanced oil recovery.

“Every utility will have a series of coal units that must be replaced over time,” says attorney Dowdy. “That does not mean that coal will become obsolete. Clean coal technologies will develop but coal will not have the same percentage of the utility market that it has today.”

Consider Duke Energy: It is retiring 3,000 megawatts of older coal units because the company has calculated that adding pollution controls to them would make no economic sense. To help replace that generation, Duke is building two natural gas combined cycle plants in the Carolinas while it will be firing up a 618 megawatt coal gasification facility in Indiana this year. That plant took an existing 160 megawatt coal plant and converted it, in a $3.3 billion public-private effort.

Duke-Indiana President Doug Esamann says that a challenging aspect of comporting to a 21st Century energy strategy is keeping industrial customers informed, which are concerned about reliability and costs. Those businesses have had stable, low-cost power for decades -- but the nation has reached a crossroad whereby it can demand that utilities fix up those older plants or require them to convert to cleaner burning fuels, he adds.

“There’s a war on coal going on,” responds Nick Akins, chief executive of American Electric Power. “If we move away from this practically overnight, it is not good for the economy or reliability. It has to be a rational transition. We are putting pollution controls on our plants. We are retiring 6,000 megawatts of coal by 2014. All were running at 60 percent capacity during peak.”

The regulatory environment is affecting coal. So is the economic landscape. Natural gas prices are now $3.25 per million Btus. There’s also an abundance of the fuel given that new drilling methods can access those shale deposits embedded in rocks. Beside that, it releases half as much carbon as coal. AEP’s Akins acknowledges that natural gas is an attractive fuel right now.

Natural gas is now the path of least resistance. But the increased demand for it will not only push up its prices but also will necessitate an expanded pipeline infrastructure. Utilities must therefore mitigate their exposure by pursuing portfolio diversification.

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