POWER January 2011 - 48

2011 INDUSTRY FORECAST
Coal Plants Challenged as Gas
Plants Surge
European carbon trading is gradually pushing down coal-fired capacity
factors, and operating costs are rising. The U.S. may not have a
carbon market, but increasing regulatory requirements are having the
same effect on coal-fired generation capacity factors and operating
costs. In the meantime, gas-fired assets are enjoying increased usage
and lower unit costs.
By Anthony J. Carrino and Richard B. Jones, PhD, HSB Solomon Associates LLC
L
ooking at the past several years of
operational performance, utilization,
and cost data across the North American
and European thermal power generation
markets, some trends are very clear.
Last year, we noted in our 2010 industry
trends forecast that coal generation had
clearly fallen from favor in the European
electric market, as shown by several years
of historical data since the advent of carbon
trading-under the EU Emissions Trading
System (ETS)-which began in 2005. In
the same European markets, gas-fired combined-cycle
plants saw increased levels of
utilization and corresponding cost reductions
on a nonfuel operations and maintenance
(O&M) basis, as costs were spread
over more production. Our perspective at
HSB Solomon Associates LLC (Solomon)
was that the North American market could
learn from the carbon trading experiences
in Europe and be better prepared when
similar changes hit our markets.
One year ago, it seemed likely that some
sort of carbon trading or carbon tax might
move ahead in the U.S. markets. Now, with
the fall 2010 elections behind us, a cap
and trade or a carbon tax seems unlikely to
move forward in the near term; however,
that does not mean we are returning to the
status quo as we knew it even five years
ago. Lessons learned from the European
carbon market experience and historical
data research provide valuable information
to North American plant operators.
Even without cap and trade or carbon
taxes, energy supply decisions continue
to be driven by the realization that carbon
will be more tightly controlled-if not
legislatively, then by U.S. Environmental
Protection Agency (EPA) regulations. As
a result, industry is adapting. In Europe,
before the ETS went into effect, European
generators began changing strategic direcJanuary
2011 | POWER
tion to prepare for ETS implementation. In
both the U.S. and Canadian markets, coal
generation owners have begun announcing
asset retirements. In a recent Internet
search, it was easy to find at least 10 generation
companies across North America
that have already announced decisions
to shut down older coal-generating units.
Coal-unit retirement dates across North
America ranged from 2015 through 2022.
From a strategic planning perspective, the
emissions control conversion costs for
smaller, older coal units are proving to be
uneconomical.
The economic downturn that began
in 2008 clearly disrupted some market
trends; however, as the situation stabilized
through 2009, some prior trends continued
along their expected paths while others
strengthened dramatically.
Other market pressures continue to
evolve. Natural gas prices remain relatively
low across the U.S. and Canada, due
mainly to advanced drilling techniques
and large shale gas development, while
nuclear projects that seemed to be enjoying
a renaissance have also been delayed
or cancelled.
Asset Utilization Reversed
In Europe, several factors converged on coal
generation beginning in 2005 with the carbon
ETS. These changes accelerated through the
market as renewable capacity grew in Europe
and as fuel prices became more volatile.
Even with the 2008-2009 economic downturn,
combined-cycle gas turbine (CCGT) assets
significantly ramped up utilization from
48% net capacity factor (NCF) in 2006-2007
to 65% NCF in 2008-2009, while coal units
were out of service or running at lower loads
due to economic dispatch (Figure 1).
The " spark green spread " overtook the
" spark brown spread. " In fact, at times, the
spark green spread was negative, a price signal
to European coal operators to leave their
units out of service. For this analysis, the
spark green spread represents the net revenue
for gas turbine generation, which is the difference
between the market price of electricity
Where the Numbers Come From
All data in this analysis come from Solomon's
proprietary database, used in our
company's worldwide benchmarking and
consulting services. For this article, we
studied data from participating power generation
units from 2002 to 2009, concentrating
on U.S., Canadian, and European
generation, further segmented into coalfired
steam and combined-cycle gas turbine
(CCGT) technologies for each region.
As with our analysis last year, for comparison
purposes, cogeneration CCGT units
that exported more than 20% of their total
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energy as steam were excluded to arrive
at units whose production was primarily
electricity.
The four " time periods " are defined
as 2002-2003, 2004-2005, 2006-2007,
and 2008-2009. For the time periods
analyzed, we used two-year average data,
starting with an analysis of changes in
fleet utilization (as net capacity factor),
then evaluating changes in availability
(as equivalent unavailability factor), and
finally cost (as inflation-adjusted total
cash less fuel, or nonfuel O&M).
47
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