This contributed column is sponsored by Business Facilities LiveXchange.
Posted by Heidi Schwartz
Economists at The Brattle Group recently released a report that examines the likely causes and magnitudes of the feedback effects of coal plant retirements on short- and long-term wholesale electricity prices. Using a case study for the eastern PJM region, the study estimates the potential increase in energy prices due solely to the impacts of retired units withdrawn from the power supply curve to be around $3-4/MWh for on-peak hours and $1-2/MWh for off-peak hours. If gas prices also rise due to increased usage from replacing some of the retiring coal plants, the total impact on energy prices could be as much as $9-11/MWh for on-peak hours and $5-6/MWh for off-peak hours.
Although many studies have projected the amount of likely coal plant retirements and retrofits due to recent environmental regulations, the implications of such supply shifts on wholesale energy and capacity prices and the related market feedback effects on plant economics have rarely been investigated. It is likely that reduced supply for electricity generation, increased operating costs, and changes in fuel demands will drive up market prices. It is also likely that, because of the uncertainty and time frames for these retirement decisions, not all of these impacts are currently reflected in public forecasts or market forward prices.
“Some feedback effects may already be partly reflected in forward prices, but likely not with strong certainty, because the environmental policies and market participants’ responses are not yet fully known,” said Frank Graves, a Brattle principal and co-author of the study. “Moreover, retirement versus retrofit studies often evaluate whether the plants at risk are profitable at expected market prices, without considering that if enough plants retire, the market prices themselves may increase. Thus, there may be a few dollars/MWh of risk in forward prices that could move either way depending on pending rule resolutions and market responses.”
In addition to energy price impacts of coal plant retirements, the study includes a qualitative assessment of impacts on capacity prices. The first effect would be to reduce the total supply of capacity in that region until replacement resources come online, hence reducing the reserve margins. This would tend to increase the capacity prices in the short to medium term. The second effect of retirements would be to decrease net CONE in capacity markets as a result of the higher energy prices. This would tend to decrease the long-run equilibrium price of capacity until the energy price impacts of retirements disappear. The study also notes that other waves of entry or exit, such as large commitments to renewables, or early retirements of nuclear units, could trigger similar feedback effects.
The study, “Coal Plant Retirements: Feedback Effects on Wholesale Electricity Prices,” is a follow up to Brattle’s coal retirement forecast report from 2012 and was co-authored by Brattle Principals Metin Celebi and Frank Graves, and Associate Onur Aydin.