14-State PJM Interconnection Region Stands to See Coal-Plant Closures Similar to Those Rolling Through Texas and California
The PJM Interconnection could be the next wholesale power market to see distressed power prices, leading to a fresh wave of coal plant retirements, according to an analysis by Moody’s Investors Service.
Coal is already under pressure in PJM, but with 22.7 GW of new, efficient gas-fired combined-cycle gas turbines (CCGTs) expected to come online in the next three to four years, PJM could be the next wholesale power market to see distressed power prices, says Toby Shea, vice president and senior credit officer at Moody’s.
“As more gas comes in, someone has to leave,” said Shea.
Cheap gas has prompted developers to build new gas-fired plants that they believe will be able to undercut existing plants. In a February report UBS noted there are 15 GW of CCGTs under construction in PJM with another 4 GW expected to clear the RTO’s upcoming capacity auction.
New gas-fired generation pushes down spot prices, but new entrants also serve to lower prices in PJM’s annual capacity auction, in which entrants bid to lock in prices three years in the future.
As more gas plants enter the market, they put increasing pressure on coal plants. Last October, Public Service Enterprise Group said it would retire 1.2 GW of PJM coal plants this year.
Right now those coal plants are providing price support in PJM, but if they close PJM could join California and Texas as the next market with distressed power prices, Shea said.
For coal plant operators, lower power prices mean the plants run less frequently. In Moody’s analysis, about 10 GW of coal plants in PJM have a capacity factor of 43% and 12 GW have a capacity factor of 58%. A coal plant is likely to close if its capacity factor falls below 40%, Shea said.
According to that analysis, a substantial portion of PJM’s coal plants are running close to the edge, and a $7/MWh drop in on-peak power prices could force them to retire.
Current market prices in PJM are about $47/MWh, so coal, with a cost of about $40/MWh, is still in the money, Shea said, but it is at a disadvantage compared with the $29/MWh cost of an efficient gas-fired plant.
In Moody’s analysis, the economics of baseload operation are not much more encouraging, with market prices around $37/MWh and coal costs at $34/MWh while efficient gas’ costs are around $25/MWh.
As coal plant operators adapt to these realities, some could look to cutting costs to prolong the life of their plants, but that also involves risks.
“If you cut costs and no one else does, that’s great,” Shea said, but if everyone is cutting costs it could lead to a downward spiral and “the market could crater.”
Some coal plants may find a new lease on life by converting to burn gas, but most coal plants in PJM, nearly 75%, are not close enough to a gas pipeline to make that feasible.
New gas build, coal retirements could make PJM next market with distressed power prices