2020 Outlook: Coal faces headwinds from aging plants, adverse market signals and high remediation costs

New legislative and gubernatorial leadership elected in the 2018 midterm elections brought heightened pressure to the coal industry in 2019 — a pressure that's expected to continue from state legislators, regulators and evolving power markets in 2020, according to stakeholders.

Over 10 GW of coal-fired power was retired in 2019, driven largely by "a sustained downward pressure on the market" expected to continue throughout 2020, a ScottMadden partner told Utility Dive in an email. Natural gas surpassed coal as the number one producer of electric power in 2016, and in April and May of 2019 renewable energy supplied more power than coal for the first time.

"[T]here's no real turnaround other than something really oddball happening."

Matt Preston

Research director of North American coal markets, Wood Mackenzie

Overall, electric generation from coal has decreased 32% in the past four years, according to ScottMadden, and both the domestic and international demand for coal are expected to decrease.

"Unless something really dramatic happens" to hurt the natural gas sector, coal is not expected to make a comeback any time soon, Wood Mackenzie Research Director of North American Coal Markets Matt Preston told Utility Dive. "The sector is … in structural decline. So there's no real turnaround other than something really oddball happening."

But proponents of the fuel say they will continue to fight to keep it viable, aided by a federal government that continues to favor the baseload resource and roll back environmental protections that make management of the plants more cost effective.

"Obviously the electricity grid is evolving and ... we all know the resource mix is changing," Michelle Bloodworth, president and CEO of coal group America's Power, told Utility Dive. "Our members still believe very firmly that the U.S. needs a coal fleet because it still provides affordable electricity ... [and] it's an insurance policy when other sources don't produce electricity."

What will keep legacy plants online?

Though the sector continues to struggle financially, and few see economic sense in building new coal plants, legacy facilities still supply over a quarter of the country's electric power. Many plants have several years of depreciation costs left, although environmental groups continue pressing utilities to pull the facilities offline early in favor of a cheaper, cleaner portfolio.

"We've turned the corner in terms of what utility planning has in store for coal," said Preston. "Utilities have decided that coal is not in their future and we're going to see more announcements on retirement" in 2020.

Regulated utilities are the most likely to push back against early retirements, he said, while unregulated utilities will likely "be looking to spend their money elsewhere."

"Clearly they have to follow where the money is and it's unlikely to be in coal units," Preston said, predicting that electric cooperatives and municipal utilities will be the "most consistent defenders of existing coal."

Coal proponents hope that reduced regulatory burdens on the industry, including proposed changes to the Obama administration’s wastewater management guidelines and coal combustion residual rules, will lower operating costs and prevent more early retirements.

"Those changes protect the environment and we think that they will not cause any more premature coal retirements," said Bloodworth.

But even with those reduced costs, analysts say coal will still face a dire economic reality.

While regulatory rollbacks "may help the economics of coal generation plants, the primary issue facing those plants remains—wholesale markets for electricity continue to be more competitive and price sensitive," according to ScottMadden. "One of our clients recently called the revised regulations 'too little, too late' explaining that it was a continued drop in top line revenue that forced the decision to close their coal-generating units."

One of the biggest issues facing regulated utilities, ratepayer advocates and regulators in 2020 will be how to balance uneconomic fuel costs with the costs of retiring a plant early that haven't been fully paid off yet, analysts and clean energy groups told Utility Dive.

Securitizing coal assets is one method of financing legislators in Montana, Colorado and New Mexico used in developing their states' clean energy policy. The strategy secures the plant's remaining balance sheet through ratepayer-backed bonds, lowering the overall cost of retiring the plant for ratepayers and shareholders — a strategy that some observers believe will be a model for other states in 2020 and beyond.

Securitization provides an "option of a different type of exit path as it becomes more clear to utilities that they have a ratepayer obligation to retire coal plants that are operating above costs relative to other alternatives," Senior Strategy and Technical Advisor at Sierra Club Jeremy Fisher told Utility Dive.

New Mexico is the only state that has fully embraced the method — the remaining balance on the San Juan power plant is fully securitized, leaving shareholders to come out even, but not profit.

Some caution that legislative example is unlikely to get as much cooperation in other states, because vertically integrated utilities get a guaranteed revenue source from coal units as long as they continue producing power, unlike merchant coal plants which face a competitive wholesale market.

"Candidly, I think utilities prefer to get their full capital return to them and at their full rate of return that's already been authorized," Director of the Interior West and Northwest Climate and Clean Energy Program at Natural Resources Defense Council Noah Long, who worked closely on the New Mexico legislation, told Utility Dive. "I think New Mexico was a bit of an exception in the willingness of the utility to take that really significant hit to its profits that securitization would require."

More than likely, he said, vertically integrated utilities will prefer to follow more hybrid models if they use that financing at all, like in Colorado or Montana.

"The reaction we've seen to securitization from some of the other Western coal-owning utilities is probably more common, in that they're potentially willing to use [securitization] in some instances, but it's probably not their first choice," said Long.

But Fisher said he's watching legislation across the Southeast and Midwest — where there is an abundance of vertically integrated coal units with large remaining balance sheets — for more securitization legislation in 2020.

How will power markets respond to a fuel in structural decline?

Another major question facing the sector is what coal's role will look like in power markets where alternative resource bids continue to provide cheaper power options.

Right before the New Year, the Federal Energy Regulatory Commission handed a victory to incumbent resources in the PJM Interconnection, voting 2-1 to effectively raise the floor price of new resources bidding into the market that receive state subsidies, the majority of which are renewables, storage and nuclear.

Coal proponents say the Minimum Offer Price Rule (MOPR) decision is a victory for 2020 that flies in the face of state-level clean energy policy actions intended to reduce coal reliance.

"Progress has been slow on wholesale market reform," said Bloodworth, but the MOPR decision is a "significant step in the right direction on addressing some of the flaws within the energy markets ... And that's what we've been advocating for. We're just advocating [to] let coal compete, but let it compete on a level playing field."

"This is an important step to address the impacts of market-distorting state policies. These policies have favored other generation resources with significant detrimental impacts to coal generation," CEO of the American Coal Council Betsy Monseu told Utility Dive in an email. "We hope to see further action in 2020 to address other electricity market policy remedies needed, including better valuing our nation's coal power plants."

Other reforms the coal industry hopes to see in the markets is a better valuation of the fuel security coal provides over renewable energy, but also resources like natural gas, because of its on-site generation capabilities that make it more reliable during severe weather that makes pipeline constraints more apparent, said Bloodworth. FERC "Chairman Chatterjee has indicated that they hope to make progress on that docket in 2020," she said.

But coal opponents say the fuel is causing its own market distortions, based on rising evidence from independent market monitors and environmental groups.

Michelle Bloodworth

President and CEO, America's Power

Research by the Union of Concerned Scientists and the Sierra Club found that regulated utilities were running coal units even when it was uneconomic to do so, leading to billions of dollars lost in the Midcontinent ISO. Regulated utilities consistently ran the units less economically than merchant plants, defending the practice as a means to avoid high startup and shutdown costs.

"Our opinion, based on the analysis we've seen from the utilities themselves, is that it's a lot less expensive for consumers for utilities to self commit the coal units because of the the way they operate," said Bloodworth. "It would be a lot more expensive if they were cycling those units on and off," though shorter day-ahead commitments proposed by MISO and SPP may mitigate this issue some, she added.

Clean energy groups acknowledged there are good reasons to self-schedule, but noted the large discrepency between regulated and unregulated utility scheduling practices is evidence that the practice could be avoided, and ignoring the issue may be causing real damage.

"One of the questions and concerns that we have at the end of the day is who is going to ultimately take responsibility for making sure that self-scheduling doesn't cause undue harm to the market," said Fisher, who led Sierra Club's research on the topic.

Analysis by the Southwest Power Pool's independent market monitor found a similar pattern — prices in SPP were suppressed by about $2/MWh because of self-scheduling practices driven largely by coal. The evidence will hopefully lead to concrete action in 2020, though it's not clear what form that action will take, or who will take the first step, Fisher said.

"If FERC passes it to the states, and the states believe that it's an issue for the markets, and the markets don't think that it's being looked at closely [by regulators], then everyone's passed the buck to someone else and we don't want that to occur," he said.

At least within SPP, he expects the issue to be taken more seriously overall and for more data to come out. Sierra Club is litigating the issue in a number of states across MISO, and will continue to be active on the issue in 2020.

"I think what we've been looking for is transparency," said Fisher. "And we're starting to elicit that both through the interest of commission staff as well as other stakeholders."

How will the sector handle mass retirements and bankruptcies?

As economic pressures on coal increase, states that rely heavily on the labor provided by the coal industry are actively resisting the change.

In 2019, observers and stakeholders have seen that fight mount in New Mexico, Montana, Wyoming and Ohio, among others, as coal plant retirements and coal mining bankruptcies pile up. Federal funding and carbon capture have been floated as one option to keep the industry viable. Though many believe it could play a role in the future, few see the technology reaching commercial-scale viability in 2020.

But labor concerns are becoming a louder voice in the clean energy transition, and many clean energy groups say the United States should do more to aid those communities in 2020.

"There's a renewed interest, or maybe a first-of-its-kind interest, in actually trying to develop robust policies that ensure a fair transition away from coal for coal workers, and communities," Senior Analyst at the Union of Concerned Scientists Jeremy Richardson told Utility Dive. "That's really exciting to see and I think it's going to help make some space for some new people at the table."

Transitioning communities that have traditionally relied on coal labor has become more of a conversation in 2019 — states like Illinois, New Mexico and Washington all included provisions for transitioning communities and creating a workforce around other industries such as wind and solar.

But the sector has a long way to go in ensuring economic development continues in areas where coal companies are seeing coal bankruptcies and plant retirements increase, including federal and state funding for pensions, healthcare and job creation, say advocates.

"There's a renewed interest ... in actually trying to develop robust policies that ensure a fair transition away from coal for coal workers, and communities."

Jeremy Richardson

Senior analyst, Union of Concerned Scientists

"If you look at the number of coal plants that have already closed, or are slated to close ... the response has been just to say, 'Well, thanks and sorry and good luck,'" said Long. "And I don't think that's an appropriate response. I think we can do a lot better than that."

Power plant decommissioning, remediation, mine reclamation and coal ash clean up should all be included in that transition as well, said Richardson. As more utilities turn away from coal-fired power, how abandoned plant sites are cleaned up is a major issue for environmentalists.

Coal ash remediation rules set by the Obama administration are another cost to the industry — the U.S. Environmental Protection Agency estimates compliance costs over $500 million annually, and full clean up costs are estimated by utilities to be in the billions.

Earthjustice found 92% of all coal plants in the U.S. have coal ash ponds that are contaminating groundwater with levels of pollutants considered unsafe for drinking — and the issue will continue to be a priority in 2020, according to the advocacy group.

"There's just all these buckets of things that are going to have to be taken care of, that are very much related to [the question of] 'How do you make sure that the transition away from coal is fair?'" said Richardson.