INFRASTRUCTURE AND PROJECT FINANCE
SECTOR IN-DEPTH
23 JULY 2015
ANALYST CONTACTS
Jairo Chung
Analyst
jairo.chung@moodys.com
212-553-5123
Caroline Guerrero
212-553-0511
Associate Analyst
caroline.guerrero@moodys.com
Gerren Hong
Associate Analyst
gerren.hong@moodys.com
212-553-4840
Dan Aschenbach
212-553-0880
Senior Vice President
dan.aschenbach@moodys.com
Jim Hempstead
212-553-4318
Associate Managing Director
james.hempstead@moodys.com
William L. Hess
MD-Utilities
william.hess@moodys.com
212-553-3837
US Electric Utilities
Coal-Fired Power Plants Won't Soon
Be Replaced by Alternative Sources
Coal’s large share of the US electricity supply means it is here to stay, at least for a
while. Coal-fired electricity generation was about 27% of total electricity supply in 2014,
down from 31% in 2005. Absent acceleration in carbon emissions regulations, it is likely to
be a major source of electricity in the foreseeable future. According to US Energy Information
Administration (EIA) data, the US had almost 300 GW of coal-fired generation capacity in
2014.
Outright replacement of all coal-fired power plants will be costly. Using the latest
EIA data, we analyzed several illustrative pro-forma scenarios in which US power generators
cease to generate electricity from coal. Our illustration considers using four different
alternative sources replacing coal with natural gas, nuclear, wind and solar. All these
scenarios would result in required revenue increases ranging from 11% to 65%, likely to
create customer and regulatory pushback. These potential rate increases do not factor in
additional costs of stranded costs associated with retiring generating assets.
The overall efficiency of the remaining coal-fired generation fleet will improve. From
2010-13, the total US coal-fired generation capacity fell by approximately 19 GW. We expect
more coal-fired power plants to retire over the next two to three years. Approximately 13
GW of capacity is set to retire in 2015 alone. However, the average fleet capacity factor
has risen to 61% today from 55% five years ago. Smaller coal-fired power plants with low
capacity factors have retired already, increasing the existing coal-fired generation fleet's
overall capacity factor.
Regulation in some states will also favor continued use of coal for now. With
continuing uncertainty around federal environmental regulations, some states are
implementing new regulations more slowly. The ‘least cost’ option for the generation mix
is still favored by some states such as South Dakota and North Dakota. Regulators in these
states are not yet willing to increase their power generation costs by quickly shifting away
from coal-fired power generation to cleaner power resources.
Continued coal-fired generation is credit positive for coal-dependent cooperatives,
municipalities and investor-owned utilities (IOUs) because it keeps revenue
requirements low. If coal-fired generation sources continue operations longer than
expected, coal-dependent cooperatives and municipally owned utilities would benefit the
most from a credit perspective. Although the majority of IOUs are already in compliance
with the latest emissions reduction regulations, those with a large coal-fired generation
portfolio will also benefit.
MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
Coal’s large share of the US electricity supply means it is here to stay, at least for a while
The US is highly dependent on coal for electricity generation. According to EIA data, coal-fired generating capacity in the US is at nearly
300 GWs, representing 27% of total generating capacity in 2014. This capacity generated about 1,600 trillion watt hours (TWhs) of
electricity in 2014, equivalent to 84 times the electricity consumption of all 7.3 million New York state households. Existing coal-fired
power plants, especially supercritical plants that are larger in size and have installed emissions controls, will continue to operate while
other generation sources are phased in over time.
Exhibit 1, below, summarizes the actual generation capacity and output by fuel source in 2005 and 2014. As shown, the US continues
to rely heavily on coal for power generation. In 2014, power produced from coal-fired generation sources was 44% higher than power
from gas-fired sources, and 105% higher than nuclear generation sources.
Exhibit 1
Coal is Still a Large Source of US Generation Capacity and Output
Actual Generation
Coal
Natural Gas
Nuclear
Hydropower
Wind
Biomass
Other
Petroleum
Geothermal
Solar
Total
GWh Generated
Actual Capacity Factor
MW Capacity
2005
2014
2005
2014
2005
2014
2005
2014
49.9%
18.6%
19.3%
6.4%
0.4%
1.5%
0.4%
3.0%
0.4%
0.0%
100.0%
39.0%
27.0%
19.0%
6.0%
4.4%
1.7%
1.1%
1.0%
0.4%
0.4%
100.0%
2,024,700
755,477
784,544
259,861
14,673
62,148
15,726
122,547
15,203
544
4,055,423
1,596,245
1,105,092
777,658
245,576
180,089
69,580
45,022
40,929
16,372
16,372
4,092,935
73.9%
20.3%
88.3%
29.5%
18.5%
58.2%
34.2%
25.8%
70.0%
14.0%
45.2%
60.3%
27.0%
87.7%
27.3%
31.0%
54.4%
60.4%
10.5%
62.2%
16.9%
41.7%
312,888
424,548
101,467
100,687
9,073
12,200
5,255
54,281
2,479
444
1,023,321
302,284
467,300
101,282
102,729
66,333
14,598
8,509
44,654
3,004
11,055
1,121,747
% of
Capacity
27%
42%
9%
9%
6%
1%
1%
4%
0%
1%
Source: EIA
According to EIA data, coal-fired generation capacity is expected to remain mostly unchanged through 2017 and 2024. Exhibit 2
depicts historical and projected capacity by fuel type, and indicates that the decline in coal-fired generation capacity is expected to be
minimal –— no massive coal-fired generation retirement is expected beyond 2015. Furthermore, the output also increased from 2012
to 2014, although there were some coal-fired power plant retirements. Exhibit 3 summarizes the net generation output by fuel type
over the last 10 years. If we apply the 2014 capacity factor level to the projected capacity from the EIA data, we would see consistent
power output from the coal-fired generation sources through 2024 rather than a reduction.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 2
Coal Generation Capacity Will Remain Mostly Unchanged (2005-24)
Data
as of 23 July 2015.
Source: SNL
Exhibit 3
Electricity Output from Coal-Fired Plants Increased Slightly in 2013 and 2014
Source: EIA
Outright replacement of all coal-fired power plants will be costly
Using the latest EIA data, we analyzed several illustrative pro-forma scenarios in which US power generators, including electric utilities,
independent power producers, municipalities and cooperatives, cease to generate electricity using coal, hypothetically replacing the
required supplies from four different alternative generating sources: natural gas, nuclear, wind and solar. All these scenarios would lead
to higher revenue requirements, with revenue increases ranging from 11% to 65%, depending on the fuel type. Although there has been
a growing acceptance of 'green' initiatives, this would create customer and regulatory pushback. If coal-fired power plants are replaced
with all natural gas-fired power plants, we estimate the incremental retail price increase would be about 11%. However, natural gasfired power plants would not be a viable option if there a new regulation for CO2 emissions because it will raise the cost of natural gas
as a replacement fuel for coal. Furthermore, these potential price increases do not factor in additional costs associated with retiring and
cleaning the retired coal power plants and the stranded costs associated with retired generation assets that were rate-based.
Each alternative generating source has advantages and disadvantages over coal, as well as over the other alternative generating
sources. For example, natural gas-fired generation produces CO2 emissions, while nuclear, wind and solar do not. Nuclear generation
provides more efficient use of land resources per MW-capacity than wind and solar, but it produces radioactive waste, which needs to
be stored for a century or more.
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23 JULY 2015
US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES
MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 4
Illustrative Shift in Supply Mix, Assuming Complete Replacement of Coal
Coal MW capacity replaced with:
Generation Capacity (MW):
Coal
Nuclear
Nat Gas
Oil/Diesel Peaker
Pumped Hydro
Geothermal
Wind
Solar
Total
Generation Capacity Factors:
Coal
Nuclear
Nat Gas
Oil/Diesel Peaker
Pumped Hydro
Geothermal
Wind
Solar
Total
Generation Volumes (GWh):
Coal
Nuclear
Nat Gas
Oil/Diesel Peaker
Pumped Hydro
Geothermal
Wind
Solar
Total
Generation Volumes:
Coal
Nuclear
Nat Gas
Oil/Diesel Peaker
Pumped Hydro
Geothermal
Wind
Solar
Total
All-in Fleet Capacity factor
Base Case
Natural Gas
Nuclear
Wind
Solar
302,284
101,282
467,300
67,761
102,729
3,004
66,333
11,055
1,121,747
101,282
708,934
67,761
102,729
3,004
66,333
11,055
1,061,096
309,177
290,018
67,761
102,729
3,004
66,333
11,055
850,076
101,282
290,018
67,761
102,729
3,004
654,281
11,055
1,230,129
101,282
290,018
67,761
102,729
3,004
66,333
1,088,898
1,720,024
1,596,245
777,658
1,105,092
115,532
245,576
16,372
180,089
16.372
4,092,935
777,658
2,701,337
155,532
245,576
16,372
180,089
16,372
4,092,935
2,373,902
1,105,092
155,532
245,576
16,372
180,089
16,372
4,092,935
777,658
1,105,092
155,532
245,576
16,372
1,776,334
16,372
4,092,935
777,658
1,105,092
155,532
245,576
16,372
180,089
1,612,616
4,092,935
39%
19%
27%
4%
6%
0%
4%
0%
100%
42%
0%
19%
66%
4%
6%
0%
4%
0%
100%
44%
0%
58%
27%
4%
6%
0%
3%
0%
100%
55%
0%
19%
27%
4%
6%
0%
43%
0%
100%
38%
0%
19%
27%
4%
6%
0%
4%
39%
100%
27%
60.3%
87.7%
27.0%
41.8%
27.3%
62.2%
31.0%
16.9%
Source: EIA, Moody’s Investors Service
As shown in Exhibit 4, the total generation volume was held constant to estimate the additional generation needed from each fuel
type to replace the output from using coal. Also, except for the natural gas-fueled additional capacity, the average generation capacity
factor for each fuel type was held constant at the actual level in 2014. We assumed that the new natural gas-fired capacity would
be more efficient, combined-cycle units with a higher capacity factor. Thus, we used a 60% capacity factor rather than 20.9% in our
calculation. Whether the coal-fired generation is replaced by nuclear with a high capacity factor or solar with a low capacity factor,
significant additional output is needed from these alternative sources in order to keep the same generation volume. For example,
nuclear output needs to be increased approximately 205% to replace the coal-fired generation entirely. With solar, an astounding
9,750% increase in its output would be needed. Exhibit 5 summarizes these assumptions. We estimated the total revenue from
electricity sales in 2014 to be approximately $427,712,000 based on the amount of electricity generated and the average retail price of
10.45 cent per kwh in 2014. We used these figures as a base for our calculation for the potential price increase shown in Exhibit 6.
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US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES
MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 5
Incremental Capacity from Each Fuel Source Needed to Replace Coal Capacity
Total Capacity
Incremental Capacity Needed
% of Increase in Output
Capacity Factor*
Natural Gas
Nuclear
Wind
Solar
708,934
241,633
144%
43.5%
309,177
207,895
205%
87.7%
654,281
587,948
886%
31.0%
1,088,898
1,077,843
9,750%
16.9%
* The 43.5% capacity factor includes 60% capacity factor for the incremental capacity of natural gas-fired plants.
Source: EIA, Moody's Investors Service
Exhibit 6
Illustrative Pro-Forma Financial Impact of Complete Replacement of Coal
Coal MW capacity replaced with:
Proforma Generation Required (MW's)
Cost to Install ($/kw)
Total Cost - Incremental Rate Base
Incremental revenue requirements
Net Income (50% equity @ 10% ROE)
Taxes @ 36%
Earnings Before Tax
Interest expense (50% debt @ 5%
coupon)
EBIT
D&A - assumed average life years
D&A - assumes straight line
EBITDA
Debt / EBITDA
Additional fixed costs - $/kw
Additional fixed costs - $
Gross Margin
Additional variable costs - $ / kwh
Additional variable costs - $
Fuel costs - $ / MWH
Fuel costs - $
Total incremental revenue requirements
Existing total revenue
Volumes sold (MWH)
Average Retail Price (cents per kwh)
% change
Natural Gas
241,633
$1,200
$289,960,151
Nuclear
207,895
$7,000
$1,455,262,421
Wind
587,948
$1,200
$705,537,655
Solar
1,077,843
$1,500
$1,616,764,500
$14,498,005
$8,155,129
$22,653,137
$72,763,121
$40,929,256
$113,692,377
$35,276,883
$19,843,247
$55,120,129
$80,838,225
$45,471,502
$126,309,727
$7,249,004
$36,381,561
$17,638,441
$40,419,113
$29,902,141
25
$11,598,406
$41,500,547
3.5x
$25
$6,040,836
$47,541,383
$2.20
$3,512
$11.94
$2,886
$47,547,781
$475,259,488
4,092,935,000
$0.116
11%
$150,073,937
40
$36,381,561
$186,455,498
3.9x
$105
$21,828,936
$208,284,434
$2.50
$3,991
$7.00
$11,174
$208,299,598
$636,011,306
4,092,935,000
$0.155
49%
$72,758,571
20
$35,276,883
$108,035,453
3.3x
$25
$14,698,701
$122,734,154
$1
$1,596
$166,728,839
20
$80,838,225
$247,567,064
3.3x
$30
$32,335,290
$279,902,354
$1
$1,596
$122,735,751
$550,447,458
4,092,935,000
$0.134
29%
$279,903,950
$707,615,658
4,092,935,000
$0.173
65%
Source: EIA, Moody’s Investors Service
In order to estimate potential cost impact, we considered the replacement costs, additional fixed and variable costs, and fuel costs.
Again, the total volume of generation was held constant. The actual 2014 average residential retail price (cents per kwh) was used as
a ‘base’ to estimate the percent change in the average rate. Based on recent construction cost estimates, we used $7,000 per kw for
nuclear and $1,200 per kw for natural gas combined cycle power plants. We have seen construction costs decline for wind and solar
projects and assumed $1,200 per kw for wind and $1,500 per kw for solar. For wind and solar, we did not assume any tax credit, since
the purpose of the illustrative calculation is to show the potential cost increase without any subsidies.
As shown in Exhibit 5, obtaining the additional capacity from natural gas is the most economical option, with roughly a 11% increase
in average residential price. The cheaper price is largely a result of the low price of natural gas – we assumed $3.50/mmbtu – and a
competitive fixed cost per every kw produced. Although nuclear would have lower fuel cost ($36.50/lb for uranium assumed in the
calculation) compared to the natural gas option ($12.00/MWh vs. $7.00/MWh), it could nonetheless be one of the more expensive
options overall, with a price increase of about 47%. Nuclear has the highest fixed costs compared to other alternative fuel sources.
Also, its installation costs have increased materially in recent years as the sector complies with additional safety measures after the
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INFRASTRUCTURE AND PROJECT FINANCE
Fukushima Daiichi disaster. Both wind and solar would have no direct fuel cost for incremental power output and installation costs
have been falling. We estimate the price increase resulting from the replacement of coal with wind or solar to be 29% and 66%,
respectively. However, these alternatives are not as reliable as nuclear or natural gas-fired combined cycle power plants. In 2014, the
average capacity factors for wind and solar were 31% and 17%, respectively.
The overall efficiency of the remaining coal-fired generation fleet will continue to improve
Between 2010 and 2013, total coal-fired generation capacity fell by approximately 19 GW, mostly in anticipation of the Environmental
Protection Agency's (EPA's) Cross State Air Pollution Rule (CSAPR) compliance. We expect more coal-fired power plants to retire
over the next two to three years. Approximately 13 GW of capacity is slated for retirement in 2015 alone. However, the average fleet
capacity factor has risen to 61% today from below 60% three years ago when the coal capacity factor was the lowest in over 10 years.
Smaller coal-fired power plants with lower capacity factors have been retired already, increasing the output of the existing coal-fired
generation fleet. Based on our observations, we believe the decline in the coal-fired generation capacity had a higher correlation with
the decline in the natural gas price than with the new environmental compliance.
Exhibit 7
Historical Capacity Factor of Coal-Fired Power Plants in the US (2005-14)
Source: EIA, SNL
Regulation in some states will also favor continued use of coal for now
Most states now have renewable portfolio standards (RPS) or goals, a policy to increase power generation from renewable resources.
However, some states, such as South Dakota and North Dakota, consider the 'least cost' option first for any new generation resource
rather than more environmentally friendly, but costlier, options. Although the current regulation of sulfur dioxide (SO2) and nitrogen
oxide (NOx) emission resulted in retirement of inefficient coal-fired power plants, regulation of and CO2 is still under discussion and
not yet in place. Given these uncertainties, some states are opting to wait instead of aggressively mandating more coal-fired power
plant retirements and adding more expensive, cleaner generation sources.
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INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 8
State Renewable Portfolio Standards and Goals as of 1 July 2015
Source: National Conference of State Legislatures
Despite the growing momentum behind stricter emissions regulations, we have seen a fair amount of new coal-fired generation
capacity added between 2008 and 2013. Largely, the new power plants were built by and to support municipalities and cooperatives.
Between 2008 and 2013, approximately 15.5 GW of new coal-fired generation were added. These are located mostly in the Midwest.
Exhibit 8 summarizes the 10 largest coal-fired plants that were built and came into service between 2008 and 2013. These were built
with various environmental controls to meet the current environmental regulations as well as anticipated regulations such as Mercury
and Air Toxics Standards (MATS). Thus, we do not expect any of these power plants to be retired in the near term.
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23 JULY 2015
US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES
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INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 9
New Coal-Fired Generation Sources Added (2008-13)
Project Owner
Power Plant
In-Service Date
MW Capacity
2014 Capacity Factor
Lower Colorado River Authority
Missouri Joint Municipal Electric Utility
Commission
Duke Energy Carolinas LLC
Luminant Generation Co
Missouri Joint Municipal Electric Utility
Commission
Public Service Company of CO
Kentucky Utilities Co.
ASOF Associates II, LLC
Omaha Public Power District
EIF Plum Point LLC
Sandy Creek
May 2013
938.6
78.8%
Iatan 2
Aug 2010
880.9
59.3%
Cliffside
Oak Grove Project
Dec 2012
Apr 2011
844
840
62.8%
90.7%
Prairie State Energy Campus
Jun 2012
812
75.1%
Comanche
Trimble County
Longview Power
Nebraska City
Plum Point Energy
Jul 2010
Feb 2011
Dec 2011
May 2009
Sept 2010
766
760
700
687
670
7,898.5
60.5%
56.7%*
61.2%
77.0%
68.1%
69.0%
*2013 actual capacity factor
Source: SNL
Continued operation of coal-fired generation is credit positive for coal-dependent investor-owned
utilities (IOU) and cooperatives and municipalities
On 29 June 2015, the US Supreme Court remanded the District of Columbia Circuit Court’s decision on the EPA's MATS, stating that
the EPA did not properly consider the cost of MATS compliance. The timing of the Circuit Court’s decision and any potential changes
to the MATS are uncertain. Should the time frame for MATS compliance be extended, existing coal-fired power plants could stay in
operation longer than anticipated. Furthermore, the time frame for compliance with the proposed Clean Power Plan, which would
reduce CO2 levels, could be delayed as well.
Coal-dependent cooperatives and municipalities such as Nebraska Public Power District (A1 stable) and South Carolina Public Service
Authority (A1 stable) will benefit from a delay in the implementation of these regulations. The majority of investor owned utilities
(IOU) are largely in compliance already with the MATS.
A further delay in the deadline for compliance with new environmental standards, and, by extension, a delay in additional coal-fired
power plant retirements, will have a negative credit impact on the unregulated merchant generators, particularly those located in the
Midwest. Coal is the dominant fuel source for power generation in this region, and delays in power plant retirements would result in a
continued surplus in the power supply, keeping power prices low.
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23 JULY 2015
US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES
MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
Moody's Related Research
Sector Comments:
»
US Supreme Court MATS Ruling is Positive for Coal-Dependent Public Power, Negative for Unregulated Midwest Generators, July
2015 (182792)
»
US Nuclear and Coal-Fired Power Plant Retirements to Jolt Some Local Governments, June 2014 (169742)
»
Draft Proposal Appears Credit Negative for Coal-Fired Plants But Others Will Fare Better, June 2014 (171339)
»
EPA's New Carbon Rule Would Add to Long-Term Strain for US Coal Producers, June 2014 (171341)
»
Shift in Electric Generation Mix Favors Natural Gas, Renewables at Expense of Coal, June 2012 (141980)
»
Credit Implications Associated with Increasingly Stringent Environmental Regulations, November 2011 (136831)
Sector In-Depth:
»
Frequently Asked Questions about the Drought in California, July 2015 (1005929)
»
Unregulated Utilities Would Benefit from Higher CO2 Price, but No Game Changer in Sight Yet, June 2015 (1005857)
»
Green Bonds Start to Bloom, May 2015 (1002584)
»
Impact of Carbon Reduction Policies is Rising Globally, March 2015 (1003462)
»
Shift in Electric Generation Mix Favors Natural Gas, Renewables at Expense of Coal, June 2012 (141980)
»
The 21st Century Electric Utility, May 2010 (124891)
»
U.S. Electric Utilities See Some Clarity in Evolving Federal Energy Policies, February 2010 (123062)
»
Carbon Risks Becoming More Imminent for U.S. Electric Utility Sector, March 2009 (115175)
»
Carbon Dioxide: Regulating Emissions Following a Long and Winding Road, November 2008 (112822)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
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MOODY'S INVESTORS SERVICE
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23 JULY 2015
US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES
MOODY'S INVESTORS SERVICE
INFRASTRUCTURE AND PROJECT FINANCE
AUTHOR
Jairo Chung
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23 JULY 2015
US ELECTRIC UTILITIES: COAL-FIRED POWER PLANTS WON'T SOON BE REPLACED BY ALTERNATIVE SOURCES