TODAY’S STUDY, July 23: Data Shows New Energy Beating Coal In The Market
PacifiCorp Coal Unit Valuation Study; A Unit-by-Unit Cost Analysis of PacifiCorp’s Coal-Fired Generation Fleet
Jeff Burks, Gary Mirich, et. al., June 20, 2018 (Energy Stategies via Sierra Club)
The economics of coal-fired generation in the Western Interconnect have changed significantly in the past decade. Market drivers such as energy efficiency, falling costs of renewable energy, low natural gas prices, and the cost of complying with environmental regulations are eroding the cost competitiveness of much of the Western Interconnect’s coal fleet. Despite this market trend, coal remains a significant fuel in the Company’s portfolio. The Company has an ownership interest in 24 aging coal units that provide power to meet 59 percent of PacifiCorp’s load. Data also suggests the costs of operating these units is increasing.
As the cost of renewable energy and natural gas decline, it is reasonable to consider whether the continued operation of the Company’s coal units is warranted if lower cost resource options exist. At the request of the Sierra Club, Energy Strategies conducted an assessment of each of PacifiCorp’s coal units against comparable replacement energy. This economic analysis was designed to compare the goingforward incremental costs of operating the coal units against three replacement resources: market purchases, wind energy, and solar photovoltaic (PV) energy. Our study employed a cashflow spreadsheet model and used publicly available data for the analysis. For each unit, the study examined a business-as-usual (BAU) case, in which it was assumed the coal unit operated to the end of its depreciable life, and a case in which the coal unit was replaced at the end of 2022. To determine a relative valuation, we compared the net present value (NPV) of the all-in cost of the coal scenario against the NPV of the replacement scenarios. We report the relative economic merit of each coal unit relative to market, wind, and solar replacement options.
Eleven of PacifiCorp’s coal units, representing 2,730 megawatts (MW), are consistently higher cost than replacement resource options. Those eleven units were found to be higher cost than obtaining comparable firm energy through market purchases. Twelve coal units, representing 3,173 MW of generation, were higher cost than replacement energy from solar PV, and all but two of PacifiCorp’s coal plants were higher cost than wind energy on a net present value basis.
In addition to the BAU analysis, the study also reviewed how capital expenditures to meet federal Regional Haze standards could impact the going-forward costs of seven PacifiCorp coal units. The study found that four of the seven at-risk units were already higher cost than the three replacement scenarios, even before environmental controls. With environmental controls, the cost of continuing to operate Hunter Unit 1 exceeded the cost of wholesale market purchases, and the cost of both Hunter 1 and 2 were higher when solar PV was the replacement resource.
The high-level approach used here is similar to that used in utility resource planning, which typically looks for the lowest cost to provide electricity services from the long-term perspective of a customer today – i.e. the present value of all foreseeable costs. A more detailed modeling approach would account for the dispatch of the coal units against prevailing energy prices, the timing of energy required and produced by market, solar, and wind options, and any transmission constraints that prevent these buildout options. Accordingly, the findings reported in here are not intended to be definitive statements. Rather, they are indicative of relative economic merit and are meant to engage a meaningful discussion on the future of PacifiCorp’s coal fleet…
Summary of Findings
Coal units are long-life assets and the economics of coal-fired generation under a regulated cost-ofservice business model are complex. It is clear, nevertheless, that the ongoing costs of operating PacifiCorp’s coal units to supply electricity to customers are increasing while the cost of renewable energy is falling. Using publicly available data from PacifiCorp and other vetted sources, this study found that eleven of PacifiCorp’s coal units, representing 2,730 megawatts (MW), are consistently higher cost than replacement energy options, and in many cases substantially so. This reality poses a fundamental question of whether some of PacifiCorp’s coal units are in fact least cost resources.
The going-forward cost of eleven coal units were consistently shown to be higher regardless of the replacement power scenario: Craig 1 and 2, Jim Bridger 1 – 4, Hayden 1 – 2, Huntington 1 and 2, and Naughton 1. With the added costs of environmental controls, the cost of continuing to operate Hunter Unit 1 were higher relative to wholesale market purchases, and the cost of both Hunter 1 and 2 were higher than solar PV when it was the replacement resource.
The study also compared the LCOE of PacifiCorp’s coal units against the LCOE of the three replacement resources. LCOE across the Company’s coal fleet varied between $26.72 and $50.43 per MWh. At the upper end of the spectrum, the LCOE of Jim Bridger Unit 2 and Hayden 2 have the highest LCOE among PacifiCorp’s twenty-two units, while the Dave Johnston plant had the lowest LCOEs. Most of the coal units have LCOEs higher than market purchases, especially market purchases at Mid-C. The LCOE of eleven coal units was higher than the solar PV replacement resource, and the LCOE of the Wyoming wind replacement resource was less than the LCOE for all but two of the twenty-two coal units evaluated in this study…