With the influx of new natural gas supplies from various shale formations throughout the continental U.S., the risks of
relying too much, or not enough, on natural gas to generate power to achieve targeted returns on generation assets is
front-of-mind for many risk managers and their C-suite colleagues.
AEP CEO Nicholas Atkins expressed concern about over-reliance on natural gas at a recent speech before the U.S.
Chamber of Commerce. He reminded lunch-goers of gas' price volatility. He probably has lots of company.
Recent retirements of coal-fired power plants appear to be part of a long-term trend that reaches beyond just low
gas prices. The rising cost of burning coal, new regulations governing coal plants by the U.S. Environmental Protection
Agency (EPA) and the growing role for demand-side resources also are putting a squeeze on the oldest and dirtiest coal
Many owners of generation plants, coal-fired or not, are deciding to retire power plants when the revenues producing
by selling power and capacity no longer cover the costs of its operations and investments necessary to keep them
operating plus a reasonable return from the production and sale of electricity.
What does the future hold? Is the price differential between coal and gas the principal driver? What about system
CCRO member company reps shared perspectives on the risks of closing power plants too soon at the April members
meeting at the corporate headquarters of Jacksonville Electric Authority in northeast Florida.
FirstEnergy was counting on closing several of its old coal-fired power generators in Northeast, Ohio this year. But May 2
it told shareholders it will delay the retirement of five units in Ohio at the request of the PJM Interconnection. PJM said
the units, with a combined capacity of 885 megawatts, are necessary to provide voltage support for the grid.
FirstEnergy spokesman Mark Durbin said the company will now operate them "reliability must-run" arrangements until
the company can complete a series of transmission system upgrades in the region to ensure system reliability.
So even if burning natural gas is more profitable, system reliability may trump the closure of old coal plants.
Overall, changing natural gas and coal prices have contributed to coal-fired electricity generation dropping by 13 percent
from 2007 to through the end of 2011. Gas-fired power production increased by the same percentage during the same
Additional risks in assessing how much to dial down coal-fired generation is how the demand for electricity will respond
to a recovering economy, how successful the EPA will be in lowering permissible emissions limits along with deadlines
for compliance (e.g. “air toxics” by 2015) and the impact time-of-use pricing will have on power consumption.
Early in 2012, some economists predicted an uptick in economic activity. Since then however, many growth indicators
have leveled off. The EPA has granted generators some long-sought flexibility in meeting more aggressive emissions
limits. The installation of smart meters and deployment of demand response and / or time-of-use pricing outside of
California loom in the future.
Barring an extremely hot summer throughout much of the U.S. natural gas prices, which dipped below $2 per million
cubic feet this spring, are forecast to remain near the $2 mark at least through the summer of 2012. See chart.