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Presented byMark Hall
February 8, 2017
Why Would Anyone Buy a Coal Plant Today?
TRC has proudly supported EUEC for more than 15 years
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The setting for coal-fired generation Possible rationale for buying coal fired generation assets in
today’s market Additional considerations when making that investment
decision
Agenda
The power generation market continues to experience significant turnover with the retirement of coal and nuclear assets and significant growth in utility scale renewables (principally wind and solar)
Electric production from gas now regularly exceeds that from coal with renewables rapidly gaining market share
North America Market Conditions
North America Market Conditions (Cont)
Power Market, US, Cumulative Installed Capacity (GW) and Annual Power Generation (TWh), 2000–2025
Title: US Power Market Outlook to 2025, Update 2015 – Market Trends, Regulations, and Competitive LandscapeReference Code : PEPEC47068Publication Date: November 2015GlobalData
U.S. electricity demand has been relatively flat and only modest growth is expected
Regional demand in the Southeast and Southwest will require more capacity as reserve margins shrink
Other US regions will see replacement of coal and nuclear with renewables and gas coupled with demand response
Regulatory drivers include tax credits and portfolio standards, air and water regulations
Natural gas price plus gas turbine efficiency advantage has propelled gas assets to a lower cost position in the supply stack
Substantial increase in installed renewables further depresses demand for coal
Future environmental requirements create additional economic pressure (ELGs, 316(b), PM 2.5 NAAQS, State CO2 standards)
Setting for Coal
Coal Retirements
Coal Capacity Retirements (MW)
Source: UBS, Fanning the Flames of Retirement, May 20, 2016
Retirements peaked in 2015 with deadline for MATS compliance.
Significant retirements will continue for economic reasons without Clean Power Plan
State action to support renewables and reduce carbon emissions have potential to cause another step change in rate of retirements
So Why Would Someone Buy an Old Coal Plant?
Cheap capacity – some recently announced transactions are well below $300/MW• If you can get a reasonable capacity payment, cut OpEx and
avoid too much dispatch, there is money to be made in short term
Run it till it dies – minimize CapEx Get lucky – owning a portfolio gives you a better chance of
getting a reliability must run type contract or similar bailout until other transmission or generation gets built• Severe weather like the polar vortex provides another
opportunity to cash in
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At some point, any given coal-fired asset will not be worth running or maintaining in ready-to-run condition Quantifying that liability is not straightforward Options that some market participants are employing
• Cold Shutdown• Plant Demolition and Site Redevelopment• Bankruptcy
How are Buyers Dealing with Future Liabilities?
Cold Shutdown
In many respects this is the easiest strategy and preserves some future options The activities typically include de-energizing equipment and systems, removal of
any fuels, sale or transfer of spares. Goal is Cold, Dark and Safe Caretaker staff or even just security Opportunistic scrapping Minimize taxes (requires approaching taxing authorities) Wait
• Possible repower scenario in the future• Possible improvement in steel scrap value
Don’t dig! The cardinal rule for most of these owners is don’t do anything to trigger a cleanup obligation
Costs – Moderate ongoing costs
Less common than cold shutdown Driver principally high redevelopment potential
• Plants in urban areas with expensive real estate and waterfront property or unique infrastructure
High scrap value for steel historically allowed for plants to be demolished at near a net $0 cost but average cost is around $15 million today
Dealing with asbestos, lead paint and PCBs can be significant part of the cost Outside of areas with high potential for redevelopment, structures often removed
to grade but no subsurface work occurs• Plants with on site CCR impoundments will have ongoing monitoring obligations
A number of power plants demolished in past decade (TRC involved in 32)
Plant Demolition and Site Redevelopment
Private equity has been setting up LLCs for plants and portfolios for years with expectation that if market conditions dictate they could shut down and walk away.
My limited survey of a few law firms is that this can be very tricky to execute.
Need to be aware of state and local regulations that could effect the success of this strategy.
Should have an alternative plan and understand the potential costs for those alternatives.• Demolition• Cold Shutdown
The Bankruptcy Strategy
Initiatives Around Transforming Cold Sites, Accelerating Redevelopment and Demolition
Power plants have unique infrastructure, on reasonably large sites Towns and Economic Development Authorities would love to
see these sites providing jobs and generating tax revenues The biggest impediment has been liability management PA Department of Commerce and Economic Development
example
