Clarification of thought about fossil fuel plants and stranded assets

February 19, 2016
TVA closing fossil plants Widows-Creek-Coal-Plant

The Tennessee Valley Authority is closing coal plants such as the Widow Creek Coal Plant here

In any conversation about the transition to a renewable energy economy, solar and wind advocates will eventually come up against the term “stranded assets,” which is usually deployed in defense of legacy fossil fuel power plants (and their owners).  But as times change, “stranded assets” could become a powerful tool for thinking about how we shift to a 100% renewable energy future “without delay” as Pope Francis says.

Defining a Stranded Asset

An asset is something you have of value, like a house or a car. In the power sector, it can mean a power plant, a substation, or a power line. “Stranding” an asset means shutting it down either a) before the end of its scheduled life or b) before you’ve finished paying for it, like scrapping a 5-year old car. Under threat of scrapping power plants built 5, 15, or even 50 years ago, utilities warn regulators of the cost of “stranded assets.”

But defending old, dirty power plants as “stranded assets” uses accounting terminology to paper over the tension between the interests of a utility interests and its customers.

Shuttering Old “Assets”

SC_IG_Part01Take a coal power plant, for example. For every kilowatt-hour of electricity it produces, it also generates these negative outputs:

  • 7,200 Btu of wasted heat
  • 3.9¢ in health damages just in Appalachia,
  • 13.3¢ in air pollution, mercury, and climate damage
  • 0.8¢ in damages from destroyed land, abandoned mines, mercury emissions, transportation fatalities, and subsidies

Cumulatively, the Harvard School of Public Health estimates the environmental and health burden adds 18¢ per kilowatt-hour of power—$345 billion per year in total—far outstripping the cost to produce the electricity. For comparison, a new coal power plant produces electricity alone for a minimum of 6.5¢ per kilowatt-hour, while wind power (with none of the health and environmental damage) produces power for 4-8¢ per kilowatt-hour.

In other words, the full cost of energy from a coal power plant far outstrips the value of its electricity. In accounting speak, a power plant that produces more costs than benefits could be characterized as a “liability.”

Uncovering Old Liabilities

Utilities defend these liabilities with arguments that millions (maybe billions) of dollars were spent to build and upgrade these power plant to be marginally more efficient and marginally less polluting. And recovering those costs requires running that coal plant until the end of its scheduled life (40, 50, 60 years or more). Debts were incurred, suggest utility executives, and today’s electric customer is bound to pay them or risk stranding these power plant “assets”.infographic-image4

Of course, utilities don’t pay most of the costs mentioned above, so in their narrow view a coal plant can be considered an asset even as it remains a major liability to the average electric customer.

Furthermore, the assumption that electric customers should be on the hook for these legacy costs assumes that they were rational at the time. But there’s plenty of evidence to suggest that investments made in coal power plants, even decades ago, were bad bets. The evidence includes:

Decisions to invest more customer dollars in these power plants in the past 20 years were irresponsible in light of the available alternatives.

In other words, legacy fossil fuel power plants are not assets, but liabilities, and electric customers are better off if utilities close them down and replace them with inexpensive, less polluting energy sources.

The Sierra Club’s Beyond Coal campaign has been very successful by getting utilities to admit that their old coal fired power plants are liabilities that should be shuttered.

Building New Fossil Fuel Liabilities

Unfortunately, in the past fifteen years, utilities have largely replaced this coal-fired power with natural gas.

us new power plant capacity 2003-15 ILSR

While marginally cleaner to burn than coal, these new power plants are at risk of becoming liabilities just as their coal-fired predecessors, in 4 ways.

For one, the total carbon footprint of natural gas power plants may be the same, because methane leakage during extraction may eliminate the relatively lower carbon emissions during combustion. New laws restricting carbon emissions will result in compliance costs that power plant owners will pass on to electric customers.

Second, the cost of renewable energy resources has been falling rapidly (wind by 61%, solar by 82% since 2009) and wind is already less costly than new baseload natural gas power. If utilities have to sell this power in competitive markets, their power plants will be unable to compete. If not, they are being poor stewards of their captive customers’ resources when they have less expensive generation options.

Third, new gas power plants put the risk of fuel price volatility onto electric customers, who have these costs passed through directly onto their bills. Natural gas prices are at historic lows, but there’s little guarantee that will last the 40-year life of the power plant.

natural gas prices for electricity generation ilsr

Finally, as the world moves toward meaningful action to combat climate change, the 80% reduction in carbon emissions by 2050 will cut off the useful economic life of new fossil fuel power plants. After 2050, it will be nearly impossible to meet emissions targets and still be operating any fossil fuel electricity generation. A natural gas plant approved in 2016 might come online in 2017 at the earliest. The 33 years between then and 2050 are already seven years less than utilities typically plan for a “useful economic life.” In other words, a new proposed fossil fuel power plant is already a stranded asset if the utility has not shortened the useful economic life (a calculation that would likely make the power plant uneconomic).

This issue is coming up all across the country as monopoly utilities file their 15-year resource plans. A perfect example is Xcel Energy in Minnesota, seeking to replace much of the generating capacity from two old coal plants with new natural gas plants. (We’ve already sent their president an open letter asking them to identify a better replacement option).

For existing power plants, “stranding” assets may make the utility balance sheet look worse, but it can be the best thing for the health and welfare of the public. For financiers of new power plants, it’s unlikely to be economical to finance a new fossil fuel power plant ever again.

This article originally posted at ilsr.org

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. MORE Contact John   |   View all articles by John Farrell

Cross-posted from Climate Progress and Joe Romm:  Natural gas production boosts methane emissions and competes directly with renewables to replace coal plants

Joe Romm adds that Fracking is not good for the climate. Or, to put it a tad more scientifically, “By The Time Natural Gas Has A Net Climate Benefit You’ll Likely Be Dead And The Climate Ruined,” as I wrote two years ago.

New satellite data and surface observations analyzed by Harvard researchers confirm previous data and observations: U.S. methane emissions are considerably higher than the official numbers from the EPA. Significantly, the EPA numbers are mostly based on industry-provided estimates, not actual measurements.

While this new study doesn’t attribute a specific source to the remarkable 30 percent increase in U.S. methane emissions from 2002–2014, many other studies have identified the source of those emissions as leakage of methane from the natural gas production and delivery system.

The central problem for the climate is that natural gas is mostly methane (CH4), a super-potent greenhouse gas, which traps 86 times as much heat as CO2 over a 20-year period. That’s why many studies find that even a very small leakage rate can have a large climate impact — enough to gut the entire benefit of switching from coal-fired power to gas for a long, long time.

Even worse, other studies find — surprise, surprise — natural gas plants don’t replace only high-carbon coal plants. They often replace very low carbon power sources like solar, wind, nuclear, and even energy efficiency. That means even a very low leakage rate wipes out the climate benefit of fracking.

Indeed, researchers confirmed in 2014 that — even if methane leakage were zero percent — “increased natural gas use for electricity will not substantially reduce US GHG [greenhouse gas] emissions, and by delaying deployment of renewable energy technologies, may actually exacerbate the climate change problem in the long term.” Exactly. In fact, a study just last monthfound that natural gas and renewables are competing directly with each other to replace coal plants in this country.

All of these findings taken together vindicate the concerns of high leakage rates raised by Cornell professors Howarth, Santoro and Ingraffea, which I reported on back in 2011. Howarth toldClimate Central this week that the increase in methane emissions “almost certainly must be coming from the fracking and from the increase in use of natural gas.” Howarth notes that even with deep CO2 cuts, we’re headed toward dangerous 2°C warming by mid-century.

“But the planet responds much more rapidly to methane, so a reduction in methane emissions now would slow the rate of global warming immediately,” he said.

The good news is that renewables are ready to handle the job of running a modern economy, so we don’t need to rely on natural gas as a “bridge” to a carbon-free future. The bad news is that many people still tout the supposed climate benefits of the fracking revolution — despite a paucity of observations and analysis to support that view and a plethora of data and research undermining it.

So let me end this post by linking to a number of the umpteen studies that undermine the climate case for fracked gas:

  • IEA’s (2011) “Golden Age of Gas Scenario” Leads to More Than 6°F Warming and Out-of-Control Climate Change
  • Study (2011): Switching From Coal to Gas Increases Warming for Decades, Has Minimal Benefit Even in 2100
  • Study (2012): High Methane Emissions Measured Over Gas Field “May Offset Climate Benefits of Natural Gas”
  • Study (2012): You Can’t Slow Projected Warming With Gas, You Need ‘Rapid and Massive Deployment’ of Zero-Carbon Power
  • Study (2012): Natural Gas Is A Bridge To Nowhere Absent A Carbon Price AND Strong Standards To Reduce Methane Leakage
  • NOAA study (2013) Confirms High Methane Leakage Rate Up To 9% From Gas Fields, Gutting Climate Benefit
  • Study (2013) Projects No Long-Term Climate Benefit From Shale Gas Revolution (based on work of 14 different modeling teams)
  • Study (2013) Finds Methane Leakage From Gas Fields High Enough To Gut Climate Benefit
  • Study (2013) Finds Methane Emissions From Natural Gas Production Far Higher Than EPA Estimates
  • “A review [2014] of more than 200 earlier studies confirms that U.S. emissions of methane are considerably higher than official estimates. Leaks from the nation’s natural gas system are an important part of the problem.”
  • Study (2014): Up To 1,000 Times More Methane Released At Gas Wells Than EPA Estimates
  • Study (2014): Expanded Natural Gas Use Worsens Climate Change
  • NASA (2014): “U.S. Methane ‘Hot Spot’ (over 3 times) Bigger than Expected”
  • Satellite Observations (2014) Confirm Methane Leaks Wipe Out Any Climate Benefit Of Fracking
  • 10 Studies (2015) find methane leakage from major fracking region much higher than EPA estimates

Bottom Line: Wishful thinking and industry estimates do not actually make fracked gas a good climate strategy.