The Rising Tide of Clean Power Investment – 5/13/16

A combination of subsidies, regulation, and falling costs are prompting a sizable wave of investments into clean power and away from coal.

Government initiatives are driving much of the new investment as utilities like Duke Energy Corp., Southern Co. and the energy unit of Warren Buffett’s Berkshire Hathaway Inc.  purchase more clean power. In response to renewable-energy mandates in dozens of states and expected federal limits on emissions, companies that currently use coal are investing in more wind and solar farms because renewable electricity can be sold at higher prices under reliable long-term contracts. Add to that, the renewal of federal renewable-energy tax credits that reduce the cost of new facilities and offset corporate taxes, and you have a cocktail of incentives encouraging investment.

On the regulatory side, one of the cases facing the Supreme Court concerns an EPA rule that would require power plants to reduce CO2 emissions. Requiring cuts of 32% from 2005 levels by 2030, the rule would mostly affect coal power plants since natural gas produces roughly half as much CO2 per unit of energy. The rule would also set a strong precedent for future CO2 regulation so it should not be surprising to hear that many states are suing in protest. However, the likelihood of a Clinton win in November and the possibility of a liberal majority on the Supreme Court have led many utilities to hedge their bets through diversification of their generation sources.

Of course, the primary factor in the shift away from coal is cost. The fracking boom alone has unleashed a flood of natural gas that is drowning out coal demand, which has fallen 29% since 2007 according to the EIA.

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Ohio and Pennsylvania saw particularly large decreases of 49% and 44%, respectively, in coal consumption due to their proximity to the cheap natural gas of the Utica and Marcellus shale deposits.

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And the projections for future costs of coal power plants relative to competing types make coal’s future look bleak. EIA estimates of levelized costs of electricity (LCOE) for power plants entering service in 2020 have total system costs for conventional coal plants at 95.1 in 2013 dollars per MWh. When compared to conventional natural gas plants (75.2) and onshore wind (73.6) it is easy to see why none of the new electric generating capacity planned for 2016 is coal-based. And keep in mind that these estimates were made in April of 2015 before December when Congress extended tax credits related to solar and wind investment for an additional five years.

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But hang on, even though solar has high cost values, the estimates for 2016 capacity additions provided by the EIA, solar power is seeing the largest gains.

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Well, as it turns out, the EIA also has a table looking at the regional variations in levelized cost of electricity for new power plants. And since intermittent clean power resources like solar and wind do significantly better in some regions than others, see California and Texas versus Alaska, it is especially important to look at cost in relation to location.

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Looking just at the minimum costs for unsubsidized total system LCOE, it turns out that conventional coal (87.1) beats solar PV (97.8), and once the permanent 10% investment tax credit is added solar goes to… 89.3. But wait, there’s more! Those the tax credits on solar and wind that Congress extended were substantially higher than assumed in for table with the solar tax credit in particular being 30% as opposed to 10%. Even before the subsidies, onshore wind and conventional gas devastate coal by all metrics of cost.

Power plants are assets with lifetimes lasting decades. Any investment in an asset lasting that long has to be made with careful consideration of its future returns relative to similar assets. That is the reason why it should not be surprising to see how little is being invested in coal. When five year cost projections show coal has no way of competing with clean power and the coal industry faces an unsympathetic political arena, one shouldn’t have to wonder why capital is flowing to cleaner sources of power. People usually to try to bet on a winning horse, not a dying one.

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