Release Dates:April 7 - 30, 2014 |Next Early Release Date:December 2014Report Number:DOE/EIA-0383(2014)Issues in Focusjeffery jones/Michael LeffRelease Date: 4/28/14In 2012, coal-fired and nuclear power plants together provided56% of the electricity generated in the United States. The roleof these technologies in the U.S. generation mix hasbeen changing since 2009, as both low natural gas prices and slower growth of electricity demand have altered their competitiveness relative to other fuels. Many coal-fired plantsalso must comply with requirements of the Mercury and Air ToxicsStandards (MATS) and other environmental regulations. Some ofthe challenges faced by coal-fired and nucleargenerators, and the implications for electricity markets if the plants are retired in significant numbers, are analyzed in thisdiscussion.Of the total installed 310 gigawatts (GW) of coal-fired generating capacity available at the end of 2012, 50 GW, or 16%, is projected to be retired by 2020 in the AEO2014Reference case. Despite those projected retirements, coal continues to account for the largest share of the electricity generation mix through 2034, after which it is overtaken bynatural gas. However, throughout the projection the coal share of total generation remains significantly below its 49% share in2007, when coal set its annual generation record.In 2012 and 2013, operators of five nuclear power reactors representing 4.2 GW of capacity announced plans to retire the reactors by 2015. Four of the reactors—San Onofre 2and 3, Kewaunee, and Crystal River—already have ended nuclear power production, and the fifth, Vermont Yankee, is expected to end generation by the end of 2014 [1]. Inaddition, the Oyster Creek plant is expected to conclude operation in 2019 [2]. These are the first retirements ofU.S. nuclear power plants since Millstone Unit 1 was retired in1998. Retirements often are the result of unique circumstances, but some owners of nuclear power plants have voiced concerns about the profitability of their units, sparkingU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm1 of 106/3/2014 4:33 PMdiscussion of possible additional nuclear retirements [3]. In order to evaluate the impacts of potential retirements beyond those in the Reference case, AEO2014 includes severalalternative cases with economic assumptions that make it less likely that existing coal and nuclear power plants will be used for generation.Factors that lead topower plant retirementsPower plant owners generally make the decision to retire plants when their expected costs exceed their expected revenues over the future life of the plants [4]. Costs incurred bypower plants can include large capital projects, such as installation of fluegas desulfurization (FGD) systems or scrubbers oncoal plants, increased operating costs, or higher fuelcosts. Revenues are received from energy sales or capacity payments in wholesale electricity markets in regions of the countrywith competitive wholesale markets, or fromcost-recovery mechanisms in regions with vertically integrated utilities subject to rate regulations [5].Recent trends in the electric power industry have resulted inboth declining revenues and increased operating costs for coal plants. Because natural gas often is the marginal fueland thus sets prices in Regional Transmission Organization (RTO) markets, and natural gas influences wholesale electricity prices in non-RTO markets, the decline in natural gasprices beginning in 2008 tends to reduce electricity prices and the payments received by all generators for the electricity they produce. Lower natural gas prices also improve thecompetitiveness of natural gas combined-cycle (NGCC) power plants relative to coal-fired plants. Whenlower natural gas prices drive the cost of generating electricityfrom an NGCC plant below that of a nearby coal-fired plant, the coal plant is dispatched, or operated, less often andearns less revenue [6].Slow growth of electricity demand in recent years has resultedin fewer high-cost marginal generators being dispatched. In regions with excess generating capacity, plants withrelatively high variable operating costs may not be dispatched frequently enough to produce the revenue needed to cover their costs [7], making them candidates for retirement.Although the average price of coal delivered to the electric powersector declined in both 2012 and 2013, it rose by more than 4% per year from 2007 to2011, and the resultingincrease in operational costs for coal-fired power plants reinforced the impacts of lower demand and more competitive natural gas prices.When faced with declining profitability, plant owners may choose to retire their units ratherthan make additional investmentsto keep them operating. In the AEO2014 Referencecase, all coal-fired plantsare required to have either a scrubber or a dry sorbent injection(DSI) system combined with a fabric filter in order to continue operating in 2016 [8] andlater years. As of the end of 2012, 64% ofthe U.S. fleet of coal-fired generators was compliant with this requirement. The remaining plant owners are in the process of decidingwhether to retrofit or retire their plants[9].The outlook for nuclear power also has been altered by the changing conditions in U.S. electricity markets. Nuclear power plants have lower fuel costs than either coal- or naturalgas-fired plants, translating to lower variable operating costs and ensuring that they are dispatched when available. The spread between the price of electricity and the fuel costfor nuclear plants is often referred to as the quark spread. Nuclear power plant owners in wholesale markets rely on sufficientquark spreads to cover nonfuel operations,maintenance, and any new capital expenses associated with the plants to provide a return on their investment. Lower wholesale electricity prices havereduced quarkspreads forall nuclear power plants, especially those with increasing operations and maintenance (O&M) costs or capital addition costs.The AEO2014 Reference case assumes an additional 6 GW of generic nuclear retirements from 2012 to 2019, beyond the six reactorretirements already announced (a total thatincludes the Oyster Creek plant), as higher-cost units face continued economic challenges. Those projected retirements are represented by derating of existing capacity for plantsin vulnerable regions, not by retiring any specific plants. Higher natural gas prices in the Reference case after 2020 supportthe continued operation of the U.S. nuclear fleet andlimit retirements from 2020 through 2040.Accelerated retirement casesAEO2014 includes several cases designed to explore the effects of alternative assumptions that change projected natural gas prices or electricity demand, or assigns a value toU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm2 of 106/3/2014 4:33 PMcarbon dioxide (CO2) emissions as a proxy forpossible future policies to mitigate greenhouse gasemissions. However, those cases have impacts throughout theenergy systemand the economy, which makes it difficult to measure the independent effects of significant coal and nuclear capacity retirements. In order to isolatethe effects of additionalretirements on the energy system,several cases were developed byincorporating assumptions thatdirectly accelerate retirements of coal-fired and nuclear power plants.Accelerated Coal Retirements caseThe AEO2014 High Coal Cost caseassumes a decrease in coal mine productivity and anincrease in coal transportationcosts, causing coal prices to rise to a level 68% abovethose in the Reference casein 2040. In the Reference and High Coal Cost cases, real O&M costs are flat, which is consistent with long-term historical trends. However, as coalplants age, higher O&M costs may also become a concern because replacement parts and upgrades to plant equipment could be required to keep them operating effectively. Inthe Accelerated Coal Retirements case, the assumptions of the HighCoal Cost case are combined with an assumed 3% annual increase in real O&M costs for coal-fired powerplants from 2012 through 2040, with the increase intended to represent the high end of potential future O&M costs. The higher fuel prices and O&M costs in the Accelerated CoalRetirements case serve as proxies for any combination of factors that would produce a higher rate of coal plant retirements.Accelerated Nuclear Retirements caseThe Nuclear Regulatory Commission (NRC) has the authority to issue initial operating licenses for commercial nuclear power plants for a period of 40 years and then to extendthem in 20-year increments. The NRC has already approved initial 20-year license extensions for more than 70% of the nuclear fleet, and the AEO2014 Reference case assumesthat each plant will receive a first license extension unless its planned retirement has specifically been reported. The nuclear power industry currently isdeveloping strategies tosubmit license applications for additional 20-year life extensionsthat would allow plants to continue operating beyond 60 years. The AEO2014 Reference case assumes thatplants reaching 60 years of age between 2030 and 2040 will be granted a second life extension.Nuclear power plants operate as baseload capacity. Although they are expensive to build and maintain, they have relatively lowvariable operating costs, which ensures that theyare dispatched when available. While not affecting their dispatchorder, increases in nonfuel O&M costs can have negative effects on the economics of nuclear power plantsthrough lower profit margins. To avoid retirement for economicreasons, a plant must maintain a positive net present value overits operating lifetime. As with coal plants, annualO&M costs for nuclear powerplants remain flat in the AEO2014 Reference case. However, recent data suggest that O&M costs for nuclear plants rose at an average annual rateof 4% over the 2008-12 period [10].The Accelerated Nuclear Retirements case assumes that O&M costs for nuclear power plants grow by 3% per year through 2040; thatall nuclear plants not retired for economicreasons are retired after 60 years of operation; and that no additional nuclear power plants are built after the 5.5 GW of capacity currently under construction is completed. Thiscase reflects uncertainty regarding actions and costs associated with continued operation of the existing nuclear fleet.Accelerated Coal and Nuclear Retirements caseLarge-scale simultaneous retirements of both coal-fired and nuclear capacity could have a significant effect on the electric power system. In order to assess that potential effect,the AEO2014 Accelerated Coal and Nuclear Retirements case combinesthe assumptions of the Accelerated Coal Retirements case andthe Accelerated Nuclear Retirementscase.ResultsRetirementsIn the Accelerated Coal Retirements case, 110 GW of capacity, or 117% more than in theReference case, is retired by 2040 (Figure IF6-1). In the Accelerated Coal and NuclearU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm3 of 106/3/2014 4:33 PMRetirements case, coal retirement levels are similar to those in the Accelerated Coal Retirements case through 2030, with a slight leveling off toward the end of the projection,when some coal-fired capacity is needed to make up for the lost nuclear capacity.figure dataIn the Accelerated Nuclear Retirements case, 42GW of nuclear capacityis retired through 2040(Figure IF6-2). However, other than retirementsearly in the projection, there is no significantreduction in nuclear capacity before the plants beginto reach their 60th year of operation, in 2029. Thesame retirement trajectory is repeated in theAccelerated Coal and Nuclear Retirements case.There is no incremental increase in nuclearretirements in the Accelerated Nuclear Retirements,despite higher O&M costs.However, incrementalretirements do occur inthe Low Nuclear case,discussed in the MarketTrends section of theAEO2014. The Low Nuclear case uses the sameassumptions as theAccelerated NuclearRetirements case, but alsoincludes the resourceassumptions from the High Oil and Gas Resourcecase that result in lower natural gas prices than inthe Reference case. As a result, economicretirements of nuclear power plants that have notoperated for 60 years do occur in the last decade ofthe projection in the Low Nuclear case, with nuclearcapacity falling to 35 GWbelow the levels in theAccelerated Coal and Nuclear Retirements case.figure dataCapacity additionsIn order to replace capacitythat is retired in theaccelerated retirement cases, more total capacity(including capacity in the electric power sector,combined heat and power, and capacity in theend-use sectors) is added than in the ReferenceU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm4 of 106/3/2014 4:33 PMcase. The new capacity mixconsists almost entirelyof natural gas and renewable energy sources(Figure IF6-3). Naturalgas-fired combined-cycleunits are favored because of their low fuel pricesand relatively moderate capital costs.figure dataGeneration fuel mixAs existing coal and nuclear plants are retired,natural gas and renewables gain increasing sharesof the generation mix (Figure IF6-4). The strength ofthis trend depends on how much nuclear andcoal-fired capacity is retired.figure dataCoal-fired generation in2040 is lowest in theAccelerated CoalRetirements case,which results inthe greatest total loss of coal-fired capacity. In allAEO2014 cases, including the Reference case,available coal-fired capacity operates as baseloadgeneration throughout the projection. Therefore,removing coal capacity results in lower overall levelsof generation. Coal-fired electricity generation in2040 is 1% higher in the Accelerated NuclearRetirements case than inthe Reference case as aresult of a small increasein coal-fired capacityinstalled at the end of the projection period.Nuclear power plants also consistently operate asbaseload generation, and their total generationvaries with changes in capacity. In the AcceleratedNuclear Retirements and Accelerated Coal andNuclear Retirements cases, nuclear generation in2040 is 40% lower thanin the Reference case. Inthe Accelerated Coal Retirements case, nuclearelectricity generation is 2% above the Referencecase level in 2040.Natural gas pricesU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm5 of 106/3/2014 4:33 PMIn all the AEO2014 accelerated retirement cases,natural gas prices are higher in most years than inthe Reference case as retirements of existing coaland nuclear capacity lead to both increased use ofexisting natural gas-fired plants and thedevelopment of new plants. The alternative caseswith the largest increases in natural gas-firedgeneration also have the largest price increases.For example, the price of natural gas delivered tothe electric power sector in 2040 in the AcceleratedCoal and Nuclear Retirements case is 11% higherthan the Reference case price (Figure IF6-5) [11].figure dataCarbon dioxide emissions in the electric powersectorCoal and natural gas are the primary sources ofCO2emissions from the electric power sector. Coalis the most significant contributor, emitting morethan twice as much CO2per megawatthour (mWh)as a combined-cycle plant fueled by natural gas.Generation using nuclear power and renewablesdoes not emit CO2.Because of the high CO2intensity of coal, scenariosthat result in less coal-fired electricity generationalso result in the mostsignificant emissionsreductions. Total electric power sector CO2emissions in the Accelerated Coal Retirements caseare 20% below those in the Reference case in 2040(Figure IF6-6). Emissions are slightly higher in theAccelerated Coal and Nuclear Retirements case,because some nuclear power generation is replacedby gas-fired generation; however, the effect of thecoal-fired capacity retirements still keeps emissions14% below the Reference caselevel in 2040. In theAccelerated Nuclear Retirements case, nuclearU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm6 of 106/3/2014 4:33 PMgeneration is 328 mWh below the Reference caselevel in 2040, while electric power sector CO2emissions are 85 million metric tons higher,reflecting an average increase of 0.26 metric tonsCO2per mWh reduction in nuclear generationacross the two scenarios. The estimated increase inCO2emissions per mWh of nuclear generationreduced, which is slightly below the estimatedincrease in CO2emissions per additional mWh ofgeneration from advanced combined-cycle plantsburning natural gas, reflects replacement generationfrom natural gas and renewables, together withsome reduction in overall electricity demand as aresult of higher end-user prices.figure dataRetail electricity pricesRetail electricity pricesvary in the acceleratedretirement cases, because natural gas prices are akey determinant of wholesale electricity prices,which in turn are a significant component of retailelectricity prices. Accordingly, the cases with thehighest delivered natural gas prices also show thehighest retail electricity prices (Figure IF6-7). In2040, real retail electricity prices in the AcceleratedCoal and Nuclear Retirements case are 12% higherthan those in the Reference case.figure dataConclusionsAccelerated retirements of coal-fired and nuclearelectricity generation capacity would cause naturalgas and renewables to gain an increased share inthe nation’s electricity generation mix. Natural gas ismost often the lowest-cost option for replacementcapacity, while renewable generation grows, spurredby the increased economic competitiveness of solarU.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm7 of 106/3/2014 4:33 PMand wind technologies toward the end of theprojection period. The rising use of natural gas inthe electric power sector results in price increasesfor both natural gas and electricity in all sectorsrelative to the Reference case (Table IF6-1).U.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm8 of 106/3/2014 4:33 PMTable IF6-1. Average delivered natural gas prices, electricity prices, and carbon diioxide emissions in four cases, 2012, 2025,and 2040Year and caseAverage delivered natural gas price topower sector(2012 dollars per million Btu)Retail electricity price(2012 cents per kilowatthour)Electric power sectorcarbon dioxideemissions(million metric tons)20123.44 9.8 2,0392025Reference 5.75 10.1 2,194Accelerated Coal Retirements 5.91 10.5 1,925Accelerated NuclearRetirements5.69 10.2 2,188Accelerated Coal and NuclearRetirements5.92 10.6 1,9232040Reference 8.16 11.1 2,271Accelerated Coal Retirements 8.60 12.0 1,821Accelerated NuclearRetirements8.57 11.5 2,356Average delivered natural gas prices, electricity prices, and carbon dioxide emissions in four cases, 2012, 2025, and 2040. History: U.S. Energy InformationAdministration, Monthly EnergyReview September 2013, DOE/EIA-0035 (2013/09)(Washington, DC, September 2013). Projections: AEO2014 National EnergyModeling System, runs REF2014.D102413A, HCLONUC.D012314A, HCCSTOM.D012314A, and LOWNUC14.D012314B.U.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm9 of 106/3/2014 4:33 PMYear and caseAverage delivered natural gas price topower sector(2012 dollars per million Btu)Retail electricity price(2012 cents per kilowatthour)Electric power sectorcarbon dioxideemissions(million metric tons)Average delivered natural gas prices, electricity prices, and carbon dioxide emissions in four cases, 2012, 2025, and 2040. History: U.S. Energy InformationAdministration, Monthly EnergyReview September 2013, DOE/EIA-0035 (2013/09)(Washington, DC, September 2013). Projections: AEO2014 National EnergyModeling System, runs REF2014.D102413A, HCLONUC.D012314A, HCCSTOM.D012314A, and LOWNUC14.D012314B.Accelerated Coal and NuclearRetirements9.03 12.5 1,946EndnotesEntergy, "Entergy to close, decommission Vermont Yankee" (Press Release, August 27, 2013; accessed March 25, 2014),http://www.entergy.com/news_room/newsrelease.aspx?NR_ID=2769.1.Exelon Corporation, "Exelon to retire Oyster Creek generatingstation in 2019" (Press Release, December 8, 2010; accessed March25, 2014),http://www.exeloncorp.com/newsroom/pr_20101208_Nuclear_OysterCreekRetirement.aspx.2.M. Wallace and G.D. Banks, Restoring U.S. Leadership in Nuclear Energy (Center for Strategic & International Studies, Washington, DC, June 2013),http://csis.org/publication/restoring-us-leadership-nuclear-energy.3.The U.S. Energy Information Administrationanalysis assumes competitiveeconomics for electric power capacity, in which variable costs determine dispatch, and fixedcosts must also be paid by electric sales revenue to continue operation over the long term.4.Capacity payments provide units with revenue for being available to run in order to ensure reliability. Capacity payments can account for a significant portion of revenue forpeak load plants, which do not run often and require financial incentives to remain available for dispatch.5.U.S. Energy Information Administration, "Dark spreads measure returns over fuel costs of coal-fired generation," Today In Energy (February 20, 2013),http://www.eia.gov/todayinenergy/detail.cfm?id=10051.6.U.S. Energy Information Administration, "Electric generator dispatch depends on systemdemand and the relative cost of operation," Today In Energy (August 17, 2012),http://www.eia.gov/todayinenergy/detail.cfm?id=7590.7.U.S. Energy Information Administration, "Assumptions to AEO2014: Electricity Market Module" (forthcoming), http://www.eia.gov/forecasts/aeo/assumptions/.8.S. Ferris, "Hatfield’s Ferry Power Station quietly closes for good," Herald Standard (Uniontown, PA, October 20, 2013), http://www.heraldstandard.com/new_today/hatfields-ferry-power-station-quietly-closes-for-good/article_cd0133e1-9adb-58c2-8f8d-66769de34835.html. Installing control equipment does not guarantee that a plant willremain economical to continue operating. Retirement of the Hatsfield's Ferry power station in Pennsylvania was announced afterinstallation of a $650 million FGDscrubber system in 2009. However, in the AEO2014 Reference case most coal-fired power plants continue operating despite the regulatory hurdle of MATS in 2016.9.Electric Utility Cost Group (EUCG), via Nuclear Energy Institute, "Annual briefing for the financial community" (February 13, 2014), http://www.nei.org/Issues-Policy/Economics/Financial-Analyst-Briefings/Nuclear-Energy-in-2014-Status-and-Outlook.10.The 2025 average price of natural gas price delivered to the electric power sector in the Accelerated Nuclear Retirements caseis slightly lower than the price in theReference case due to a decline in LNG export capacity additions.The retirement of nuclear capacity in the Accelerated NuclearRetirements case after 2030 causes anincrease in demand from the electric power sector, resulting in higher natural gas prices, and the anticipation of higher prices reduces the economic competitiveness ofLNG export facilities, lowering LNG export projections. This results in lower natural gas prices in the Accelerated Nuclear Retirements case between 2022 and 2032,because less natural gas is exported. Demand from the power sectordoes not change significantly from the Reference case untilsignificant amounts of nuclear capacityare retired.11.U.S. Energy Information Administration - EIA - Independent Statistics and Analysis http://www.eia.gov/forecasts/aeo/power_plant.cfm10 of 106/3/2014 4:33 PM