Coal’s share of the U.S. generation mix fell 9.6% from the prior year to 23.7% in March as the shares of natural gas, nuclear, hydro, and non-hydro renewables grew 3.5%, 1.9%, 1.3%, and 2.7% respectively. This shift was caused by the confluence of coal plant retirements and mothballing resulting from the protracted downturn in power prices due to low gas prices, weather-subdued demand, and the ongoing effects of the EPA’s Mercury and Air Toxics Standards (MATS) rule.

Key Details

• Markets: Low-cost natural gas, increased renewables, and performance penalties continue to produce negative free cash flow for aging coal plants bidding into regional markets
  • These unfavorable conditions are being exacerbated in hybrid markets where demand curves remain vertical and regulated generators do not factor capacity costs in their bid price as they are recovered through a separate rate base mechanism
• Weather: March was 23% warmer than the prior year, which resulted in a 6.8% decline in electric retail sales generally and a 14.4% decline in residential electric retail sales specifically
  • This shifted the demand curves downward causing coal units to sit idle as their average capacity factor dropped 15.1% YoY to 35.5% in March—their lowest average capacity factor on record
• MATS: In addition to the 21 GWs of coal retirements that occurred in 2015, largely due to MATS, the rule is expected to cause more than 38 GW of retirements between 2016 and 2020
  • These retirements would result in an estimated 169 TWhs of lost generation (approximately 4% of total generation in 2015)

Implications

• With the decline of coal generation occurring at an historic pace due to pressure from all sides, utilities are being faced with the difficult decision of prematurely retiring existing plants or confronting significant cash losses and higher operating and debt service costs
• Adding to the current pressures facing coal, entities such as Citigroup and the state of California are now encouraging, and in some cases requiring, divestment of utilities that generate more than 30% of their electricity from coal
  • This will work to increasingly restrict debt and equity capital markets and produce deeper liquidity concerns for smaller, more exposed utilities
• Analysts expect regulated utilities to recover the higher costs from end users at the expense of weaker financial metrics and potential credit downgrades
• IPPs, on the other hand, are expected to transition their fleets away from coal while hoping to take advantage of the scarcity pricing that could emerge as retirements continue and reserve margins tighten nationally

More Information

EIA: Electricity Monthly Update: March 2016

Fitch Ratings: Evolving policies may challenge US public power liquidity

SNL Financial: Financial institutions turn their backs on coal, but does it matter?

SNL Financial: Q1 US coal generation down nearly 25% as it cedes market share to gas, renewables

Utility Dive: EIA: coal generation drops 22.2% in March