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U.S. Coal-Fired Power Plants: Update or Close?

The owners of power plants that burn coal are playing high-stakes poker as they decide whether to install expensive pollution controls or shut down
Gallatin Power Plant, Tennessee Valley Authority



TVA

If one were to sketch a family tree of eastern U.S. power plants, the Gallatin Fossil Plant outside Nashville, Tenn., and the Big Sandy Power Plant in eastern Kentucky might be distant cousins. Separated by 300 miles of Cumberland Plateau, the two hulking coal burners share lineage as power plants that helped industrialize the South after World War II.

The plants' respective owners, the Tennessee Valley Authority and American Electric Power Co. Inc., also have some things in common. They are two of the nation's largest electric utilities with a combined 14 million customers in 17 contiguous states from Ohio to Texas. Both also have long histories of bringing inexpensive power to Appalachia, one of the nation's poorest regions.

But when it comes to their futures, the Gallatin and Big Sandy coal plants have met sharply divergent paths, with significant implications for their surrounding regions. The 976-megawatt Gallatin plant, built in the 1950s on a bend in the Cumberland River 30 miles east of downtown Nashville, will soon undergo an estimated $1.1 billion in upgrades to its environmental controls, potentially securing the plant's operation well into the 21st century.

"The Gallatin project will further improve air quality in the Tennessee Valley, which is cleaner today than it has been in decades," TVA executives said last month when they announced the plant would be retrofitted with sulfur dioxide scrubbers and selective catalytic reduction units to help reduce nitrogen oxides, a primary ingredient in ground-level ozone.

Meanwhile, Big Sandy, with 1,078 MW of generation capacity, will produce its last power in 2015, making it one of the largest coal plants in the country to give way to economic, regulatory and public pressures that are challenging coal's role as the dominant fuel for electricity in the United States. AEP subsidiary Kentucky Power decided to shutter Big Sandy late last year after reversing course on its own planned $1 billion investment in that plant's environmental controls.

While neither the Gallatin nor the Big Sandy decision represents wholesale changes in either utility's operations -- both have large, diversified fuel portfolios -- the choices do highlight the difficult decisions facing the nation's power producers. They are increasingly stretched between meeting the near-term demands of customers and shareholders while also guarding against broader shifts in the economic and regulatory landscape that could significantly change the way they do business.

"It's a complicated maze of a decisionmaking process to determine whether you're going to retire or invest more money in a particular plant," said one senior environmental policy expert with a national utility trade group. "Frankly, these decisions require making predictions about the future, and hardly anyone gets those kinds of predictions right."

Betting $1 billion on an uncommitted EPA
Getting it wrong could be a $1 billion mistake, something no power company wants on its balance sheet. It's also the kind of miscalculation that can trigger regulatory scrutiny and incite enough public backlash to send even seasoned utility executives to early retirement.

In the Gallatin Fossil Plant's case, observers say TVA is making a leap of faith that U.S. EPA will not impose a cap on carbon dioxide emissions from every power plant in the United States, allowing it to pursue a more flexible, plant-by-plant approach to emissions reductions.

Experts say CO2 regulation of existing coal plants, which remains an open question under the Obama administration, would effectively end the working lives of hundreds of base-load power units in the United States, including plants like Gallatin and Big Sandy that are too big, too old and too carbon-intensive to be considered for eventual carbon capture retrofits.

In fact, environmentalists are counting on EPA to bring coal-fired plants under some form of carbon regulation, via either a cap on CO2 emissions or a carbon tax that would artificially drive up the cost of burning coal. The agency is legally bound to address utility carbon emissions under a 2010 settlement agreement reached among the Obama administration, environmental groups and states concerned about the role industrial CO2 emissions have in a warming climate.

A first step toward utility-sector carbon regulation came last year, when EPA rolled out its "Carbon Pollution Standard for New Power Plants." That proposal, which remains in draft form after EPA missed an April 13 deadline to issue a final rule, would restrict coal plant carbon emissions to 1,000 pounds of CO2 per megawatt-hour of electricity generated. Most experts agree the rule would make construction of new coal plants impossible for at least another decade until carbon capture and storage technologies are proved to work and then commercially deployed.

The expected second phase of utility carbon regulation targets the several hundred existing coal plants that operate in almost every state in the country, accounting for roughly 40 percent of total U.S. electricity generation, according to the most recent Energy Department figures.

Such plants -- which include the Gallatins and Big Sandys of the utility industry -- remain stuck in a web of uncertainty whereby any short-term improvements in environmental performance could be trumped by much tougher EPA rules on carbon dioxide coming in the future.

That uncertainty was looming large when AEP and Kentucky Power chose last year to abandon the previously announced program of extensive environmental retrofits at Big Sandy.

Melissa McHenry, an AEP spokeswoman, said the decision to close Big Sandy was based on a complex set of economic factors, including whether AEP's 175,000 customers in eastern Kentucky could shoulder the cost of the upgrades, which would have translated into a roughly 31 percent rate hike across the utility's service territory.

Rather than risk the downside of spiking electricity rates, AEP has proposed that Kentucky Power acquire a 50 percent ownership stake in a power plant in West Virginia for roughly $536 million, or half of what the environmental controls would have cost at Big Sandy.

"There's a lot of factors that go into those decisions. And at the end of the day, we have to do what we think is right to protect our ratepayers and our investors," McHenry said. In the case of Big Sandy, closure was deemed the best option, she said.

So what of TVA's decision to extend the Gallatin plant's life well into its sixth decade?

'A close question' on Gallatin
Scott Brooks, a TVA spokesman, said Gallatin underwent an exhaustive review in which utility executives and analysts weighed three scenarios for the plant: pollution control upgrades, converting the plant to burn biomass or retirement.

Ultimately, he said, the analysis showed TVA's best option was to invest in pollution controls for the non-CO2 pollutants rather than convert or shut down the plant. "Historically, it is one of the most efficient in the fleet," Brooks said in an email.

Cost scenarios for the various proposals also affected the decision. While adding the pollution controls was estimated to cost roughly $1,000 per kilowatt of energy produced, conversion to biomass ranged in cost from as little as $500 to as much as $3,000 per kilowatt, according to a federally required environmental assessment of the proposals.

"Converting the [Gallatin] boilers to biomass could also result in a reclassification of the boilers to new industrial boilers (IBs), with different associated MACT (maximum achievable control technology) requirements," the analysis states. "IBs burning biomass are subject to emission limitations for [particulate matter], mercury, and carbon monoxide. It is likely that TVA would have to obtain a new major source construction permits to support converting [Gallatin's] boilers to biomass; a potentially complicated and lengthy process."

On the question of retiring Gallatin's four coal boilers, TVA decided that option "would not maintain an existing energy asset available to generate reliable and cost-effective energy for the region. Nor would it help meet TVA's plans and identified need for a more balanced energy resource portfolio."

Despite those findings, TVA's president and chief executive officer, Bill Johnson, acknowledged in a memorandum that the decision to approve the upgrades at Gallatin was "a close question."

He added that TVA is already committed to retiring 18 less-efficient coal units at plants elsewhere in Tennessee and in north Alabama, and that Gallatin should be considered for closure only after the air quality improvements expected from the first round of closures are fully calculated. "Despite their ages, these units have been some of the best performing coal units on the TVA system," Johnson wrote in the memo authorizing the retrofit work.

Environmentalists want Gallatin closed
But environmental groups, including the Sierra Club, which helped secure a 2011 settlement agreement with TVA requiring the utility to clean up its coal plant emissions, aren't satisfied with the Gallatin decision.

Along with three other groups, the Sierra Club late last month filed a lawsuit seeking to block the planned Gallatin retrofits. The groups charge that TVA's decision failed to comply with the National Environmental Policy Act because executives did not give sufficient consideration to the alternative scenarios, including closing Gallatin's four coal-fired boilers.

Louise Gorenflo, chairwoman of the Sierra Club Tennessee chapter's Beyond Coal campaign, in a statement called TVA's decision a misguided plan to spend "$1 billion in customer money to prop up an obsolete coal plant," adding that the decision was made in the face of strong public support for the alternative scenarios.

In addition to concerns about Gallatin's air emissions, environmental groups are also angered by TVA's plans to use a former wildlife management area to store coal ash; the discharge of wastewater into Old Hickory Lake, a tributary of the Cumberland River; and the planned relocation of an aquatic research facility dedicated to endangered species.

"Fundamentally, TVA short-circuited the NEPA process by ignoring the most obvious and cost-effective alternative to protect the environment -- retirement of the Gallatin Plant," states the court complaint filed in U.S. District Court in Nashville.

Stephen Smith, executive director of the Knoxville, Tenn.-based Southern Alliance for Clean Energy, which did not join the Sierra Club lawsuit, called TVA's decision on Gallatin shortsighted in light of potential future CO2 regulation and the utility's heightened exposure to financial and regulatory risk.

"All of us were disappointed that they decided to go the coal route," he said. "In hindsight, I think it will probably be viewed as a mistake."

But he said the decision does not necessarily reflect an abandonment of TVA's promises to reduce its reliance on coal-fired generation. Broadly, he said, TVA has been more receptive than many other utilities to shifting its portfolio away from coal, with projected retirements of between 2,400 and 4,700 megawatts over the coming decades. While the pace of those closures is slower than many environmental groups want, he noted that TVA is not entrenched.

"The Gallatin decision is one snapshot that will probably wind up being viewed as a mistake," he said. "But in the overall context, you still see TVA moving away from coal."

EPA's crystal ball remains cloudy
Meanwhile, uncertainties loom over EPA's future direction on regulating carbon from power plants like Gallatin and Big Sandy.

Gina McCarthy, the agency's administrator-designate who awaits Senate confirmation, has assured anti-regulation lawmakers that EPA has no immediate plan to craft such a rule, though she refuses to close the book on action down the road.

"In the event that EPA does undertake action to address [greenhouse gas] emissions from existing power plants, the agency would ensure, as it always seeks to do, ample opportunity for States, the public and stakeholders to offer meaningful input on potential approaches," McCarthy said in recent written comments submitted to the Senate Environment and Public Works Committee (E&ENews PM, May 6).

Jeff Holmstead, the former EPA air division chief under the George W. Bush administration and now head of the environmental strategies group at Bracewell & Giuliani in Washington, said the consensus view within the utility industry is that EPA will attempt to regulate CO2 from existing coal plants. But he said there is considerable doubt over whether the agency can cap such emissions at every utility smokestack, or whether rules will have to account for a variety of other factors, including how a utility's overall fleet is maintained and operated.

"Future carbon regulation under the Clean Air Act won't be like MATS [Mercury Air Toxics Standards] or CSAPR [the Cross-State Air Pollution Rule], where EPA sets very clear and rigid standards," he said. "Most of these plants are quite efficient already, so most people believe there isn't much else EPA can do under the Clean Air Act to burden these plants with respect to CO2."

As for other regulatory approaches, Holmstead said: "There is some chance that there would be some future carbon regulatory scheme, but at this point it seems further away than it did five years ago."

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC. www.eenews.net, 202-628-6500

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