Coal’s Death Spiral

December 6, 2011

A couple years ago I had lunch with a top executive of one of the state’s leading utilities. Here’s the gist of the question I put to him.

“I know you guys want to build a new coal plant nearby here, and I believe you when you say you fully intend to sequester CO2 down the road. But here’s the problem. You can’t even begin building without first raising the price of electricity. We can argue how much – 15, 20, 30 percent – but we all know it’s going to go up.”

He nodded.

“Well, I’m not an economist, but I do remember from Econ 101, that if you raise the price of something, demand goes down. Furthermore, if you raise the price of something, for which the market is already soft, where demand is already flat or declining, and for which people have readily available alternatives – demand could go down a lot. So you raise rates – demand goes down, revenue goes down, you can’t pay the cost of your note for the new plant.”

“So you raise your rates again. See what I’m getting at? It’s a downward spiral. We’ve seen this before in the 70s and 80s, when, in the wake of the oil price rises, people realized for the first time that energy conservation made sense, and electrical use flattened out – completely flummoxing the economic planners who said that would destroy the economy.”
“Your position is unenviable. If you build a giant new power plant, you’re riding into a box canyon economically – the economics of the death spiral are unassailable – and frankly, I think the last thing this state needs is another one of our flagship companies to be circling the drain.”

We finished our lunch and parted amicably.

A few months later, the company put the project on hold.

Now, 18 months later,  that particular project has been cancelled. The reasons, according to a company press release:

The utility said it was cancelling the new clean coal plant project because of the same market factors that led it to defer development of the project in May 2010.  Those primarily are reduced customer demand for electricity due to the recession and slow economic recovery, surplus generating capacity in the Midwest market, and lower natural gas prices linked to expanded shale gas supplies.  Lower natural gas prices make new coal-fired power plants less economically attractive.

 I wonder if it also had anything to do with this recent announcement out of Minnesota?

Minneapolis Star-Tribune: 

Minnesota’s second-largest electric company has spent $437 million on a recently completed coal-burning power plant 85 miles west of Fargo.

Built with the encouragement of North Dakota’s political leaders, the plant burns lignite mined in that state. It has best-available pollution controls and draws city wastewater instead of fresh water. At full power, the new plant could supply about 63,000 homes.

Instead, owner Great River Energy is shutting it down.

While investing hundreds of millions of dollars in power plants always carries risks, the tale of the Spiritwood Station is an extreme case. The head of an industry trade group couldn’t remember another new U.S. coal plant built to supply power all the time that was immediately mothballed.

A combination of factors made Spiritwood a financial drag on Great River Energy (GRE), a Maple Grove-based wholesale cooperative serving 650,000 customers from the Iowa state line to the Canadian border. These included slower-than-expected growth in electricity demand, lower prices on power sales to the grid and the loss of a key industrial customer for some of the plant’s steam.

“We could run it, and lose money half the time,” said Rick Lancaster, vice president for generation at GRE.

A soft economy is certainly a factor in this situation. But soft or not, the economic fundamentals don’t change. And the dynamic is the same, whether the new facility is coal, nuclear, or gas. The advantage that gas turbines have over coal and nukes is that they are quicker to build,  meaning cost of capital is lower.
And, a quicker build means you don’t have as distant a time horizon to project electrical demand and economic conditions. Renewables, particularly, at this stage, wind, are even much quicker to build, and can be built incrementally – 10, or 50, or 200 MW at a time, instead of betting the farm on a 5 or 10 billion dollar project, you can plan, and build within your means, in a time frame you can see much more clearly.

Making it even more interesting is the emerging economics of solar photovoltaics, which have only come into sharper focus in the last year. You can argue the time frame, but at some point, in most parts of the country, over the next 3, or 5, or 10 years, photovoltaics become cheaper to install than buying power from a coal burning utility.  That’s when the paradigm shift begins, with unpredictable results — but a coal project starting today might well be nearing completion just in time for its obsolescence.

A lot of the ideas we’ve had about power generation for the last 80 years or so are about to go out the window, in an industrial revolution that’s going to make the internet seem like a minor speed bump.  In fact, the new electrical grid will use the technology of the internet, and look a lot more like the internet than the current centralized arrangement.  This will be a time of creative destruction for utilities – some of whom won’t make it.

There’s no guarantee for anyone, but those that tie themselves up with enormous financial commitments to centralized projects that do not support the emerging paradigm are sure to have a tougher time surviving.

7 Responses to “Coal’s Death Spiral”

  1. Donald Says:

    Something that might be worth investigating, a while back, maybe two years or so, a Tasmanian company discovered a new method of making paper-thin solar cells that are some 40% more effective than other similar solar cells.

    The cells are made in rolls containing hundreds of thousands of cells and can be “glued” to walls, roofs and so on.

    I’m not even sure if the link refers to the same company but it makes for some good thoughts about the future.

    Only a few weeks ago I heard from a friend at Wollongong Uni that the cheapness of these cells is one of the biggest reasons why our Australian government stopped solar subsidies.

  2. Martin_Lack Says:

    Will someone please point this out to Chris Huhne MP, the UK’s Secretary of State for Energy and Climate Change (avoidance – hopefully)? Goodness knows, I have tried but still he persists (see his rooftop interview @ 25:00 in this BBC Countryfile programme) in pinning the UK’s hopes of emissions reductions on something that is unproven and would be – in addition to being hyper-expensive – inherently dangerous.

  3. mrsircharles Says:

    Martin. Why don’t you write an open letter to Chris Huhne (and the press)? Would be grand.


    • Martin_Lack Says:

      I’ve written 1 letter and 2 emails to him in the last 12 months. The replies I have got are always computer-generated and never fully address the issues raised. I have not received a reply to my most recent email (posted online on 11/11 – see above link) sent a month ago (some of which you will clearly not like) but, I felt the points raised by James Hansen in Storms of my Grandchildren deserved a few straight answers. I will let you know if I get any…

  4. […] was reminded of that song when I happened across another anti-coal blog post this morning. The title of this post indicates the author’s belief that the coal industry is in a […]

  5. […] posted before about Coal’s death spiral from the viewpoint of utilities, and  the warnings from the US Geological Survey about the […]

  6. […] ever before. That means, by the time the new power plant is online, the demand for it has dried up. This is the death spiral, and it’s coming to utilities everywhere that do not wake up to the new […]

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