Why would anyone buy a coal-fired power plant today? From Massachusetts to Arizona and many places in between –like Alabama, Indiana, Ohio, and Kentucky–the headlines are filled with reports of coal plants going out of business or being marked for shutdown. They’re the victims of not only tightened environmental and emissions rules, but also intense price competition from gas-fired plants enjoying the cheap gas prices of the fracking boom.
Outside of the southwestern and southeastern United States, where more power-generating capacity will be needed, no more than modest demand in growth for electricity is forecast. Both coal and nuclear power will be replaced in many states by renewable energy sources and gas generation coupled with demand response. More than 36,000 megawatts of coal-fired capacity retired across the U.S. in 2015 and 2016–an amount comparable to the entire New England power grid–and close to 20,000 megawatts more are expected to be out of business by the end of 2020.
And yet … It’s not out of the realm of possibility to consider that there may be circumstances under which buying a coal plant makes financial sense for an investor/operator. It will take some guts and some luck, but paths exist for buying a coal plant and operating it profitably.
One of the biggest reasons this is true is how cheap coal capacity is to buy. Some recently announced transactions for coal plants have been at prices well below $300 per megawatt. That is one-third to one-fourth the U.S. Energy Information Administration’s estimates for building a new gas plant, one-sixth the cost of new on-shore wind, and one-eighth the cost of new solar. In some cases those plants can comply with the recent Mercury and Air Toxics requirements and meet other emission limits for NOx and SO2.
Beyond that, with such low up-front costs, as I outlined in a presentation to the Energy, Utility & Environment Conference (EUEC) in San Diego in February, there are four scenarios that can lead to a coal plant becoming a moneymaker:
In many areas of North America, power plants get paid through both capacity markets and energy markets. If you can get a reasonable capacity payment, reduce operating expenses, and avoid being dispatched to run too often when your economics are marginal, there is money to be made in the short term.
Many places where there are electric transmission bottlenecks, reliability issues or new plants facing construction delays, “must-run” contracts guarantee plant owners profitable prices to produce power. Identifying opportunities to buy what could become a “must-run” coal plant while new transmission or new generation are being completed may prove a moneymaker.
A recurrence of a severe weather event like the 2014 Polar Vortex could trigger a dispatch order (or a series of them) for your coal plant to run with strong margins.
A “run it till it dies” strategy cuts capital investment in the coal plant to the minimum, safe level possible in order to extract maximum possible profit from the operation of the plant, as long as it can last.
Of course, 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, and it’s worth seeking guidance from specialists who have deep experience with the operations and economics of coal plants. Often the best strategy is to go into “cold, dark, and safe” shutdown mode to see if energy markets turn, re-powering the plant to gas makes financial sense, steel scrap prices rise, or something else changes allow for a solid return on investment to be realized.
Among the options that might emerge over time is the profitable redevelopment of the site for industrial, maritime, commercial, and recreational opportunities. Once an energy-based strategy for a coal plant has run its course, a real-estate strategy may prove profitable and successful.
When all the headlines seem uniformly negative about the economics and future of coal-powered electric generation, 2017 just may be a time that savvy investors can search for and find interesting and potentially profitable deals on coal plants.