The Economic Impacts and 

Risks Associated with Electric 

Power Generation in Appalachia 

Eric Bowen, Christiadi, Rebecca J. Davis, John Deskins, and Charles Sims 

West Virginia University 

Commissioned by the Appalachian Regional Commission 

January 2018 

Photo of the Longview Power plant in Morgantown, WV, by project team, courtesy of Shutterstock.com. 
2 

Table of Contents 

Executive Summary ..................................................................................................... 5

Chapter I: An Overview of the Electric Power Industry in Appalachia .......................................... 7

Electric Power Generation .......................................................................................... 7

Electric Power Sector Employment ............................................................................... 10

Electric Power Plants ............................................................................................... 12

Chapter 2: Regional Economic Impact of Electric Power Plants in Appalachia .............................. 16

Chapter 3: Risk Factor Analysis of Coal-Fired Generation Retirements and Repowerings in Appalachia 20

Analytical Approach ................................................................................................. 26

Risk Factors .......................................................................................................... 34

Primary Risk Factors ............................................................................................. 36

Secondary Risk Factors .......................................................................................... 38

Repowered units ..................................................................................................... 40

Conclusion ............................................................................................................ 43

Appendix A: Real Options Model for Economic Retirement of Coal-Fired Generation ...................... 44

Appendix B: Parameter Estimation and Solution Procedure .................................................... 48

Electricity and Coal Price Expectations .......................................................................... 48

Generation and Fuel Use ........................................................................................... 49

Variable, Fixed and Sunk Costs .................................................................................... 49

Solution Procedure .................................................................................................. 50

Appendix C: Plant Database Description and Additional Detail on Power Plants ............................ 52

Terms and Abbreviations .............................................................................................. 57

References .............................................................................................................. 58

 
3 

List of Figures 

Figure 1: Electricity Generation, Appalachia and U.S. ............................................................ 7

Figure 2: Fuel Consumption for Electric Power Generation, Appalachia ....................................... 8

Figure 3: Fuel Consumption for Electric Power Generation, U.S. Excluding Appalachian Counties ....... 9

Figure 4: Employment in Electric Power Generation ............................................................. 10

Figure 5: Employment Change in Electric Power Generation by County, 2005-2015 ........................ 11

Figure 6: Coal and Natural Gas Power Plant Capacity, 13 Appalachia States ................................ 12

Figure 7: Retired Coal-Fired Generating Units and Capacity in Appalachia .................................. 13

Figure 8: Change in Use of Coal in Electric Power Generation, 2005-2015 ................................... 14

Figure 9: Change in Use of Natural Gas in Electric Power Generation, 2005-2015 .......................... 15

Figure 10: Estimated Effect of a Coal-Fired Power Plant Retirement ......................................... 19

Figure 11: Appalachia and Surrounding NERC Regions ........................................................... 20

Figure 12: Coal-Fired Generating Units in Appalachia and Surrounding NERC Regions, 2011-2015 ....... 22

Figure 13: Coal-Fired Unit Fuel Efficiency by Age of Unit ....................................................... 29

Figure 14: Expected Price and Three Monte Carlo Simulations of Price, Widows Creek .................... 30

Figure 15: Widows Creek Retirement Threshold .................................................................. 31

Figure 16: Effect of a 5-Percent Change in Each Factor on Coal-Fired Unit Retirement Threshold ...... 35

Figure 17: Primary and Secondary Risk Factors for Coal-Fired Unit Retirement ............................. 36

Figure 18: Transition from Coal to Natural Gas and Wind by Year ............................................. 55
4 

List of Tables 

Table 1: Summary Statistics .......................................................................................... 17

Table 2: Regression Results .......................................................................................... 18

Table 3: Coal-Fired Power Plants that Retired Between 2011 and 2015 ...................................... 23

Table 4: Coal-Fired Unit Retirements, 1993-2015 ................................................................ 25

Table 5: Average of Parameter Values Used in Economic Lifetime Analysis ................................. 27

Table 6: Economic Case for Coal-Fired Generating Unit Retirement .......................................... 32

Table 7: Coal-Fired Units that Repowered to Natural Gas After 2011 ......................................... 42

Table 8: Characteristics of the U.S. and Appalachian Electric Generating Fleet, 2015 .................... 53

Table 9: Coal-Fired Unit Repowerings, 1993-2015 ................................................................ 56
5 

Executive Summary 

The electric power industry is a crucial part of the coal ecosystem, accounting for the large majority of 

the total coal production sold within the United States. This report provides a detailed examination of 

the economic impact of changes in electric power generation in Appalachia over the past decade. We 

begin in Chapter 1 with an overview of the industry, paying special attention to coal-fired power 

generation. In Chapter 2, we estimate the effect of a loss of a power plant on county economic 

outcomes. Last, in Chapter 3, we examine the risk factors for further power plant retirements. 

Highlights of this research are as follows: 

THE ELECTRIC POWER INDUSTRY 

 OVERALL ELECTRICITY GENERATION: Overall electric power generation changed little nationally 

over the years 2005 through 2015. However, generation from the Appalachian Region fell by 

more than 15 percent during that period, while generation outside the Region rose by nearly 3 

percent. 

 ELECTRIC POWER GENERATION FUEL MIX: Coal has fallen substantially as a fuel for electric 

power generation in Appalachia. Coal represented around 53 percent of total generation in 

Appalachia in 2015, down from just over 74 percent 10 years prior. However, Appalachia 

remains much more reliant on coal for electric power generation compared with the rest of the 

nation, where coal represents around 35 percent of generation. 

 ELECTRIC POWER SECTOR EMPLOYMENT: Total electric power employment has fallen 

considerably over the period of analysis. However, employment declined to a greater degree in 

Appalachia, falling from just over 50,000 workers to about 48,500, a decline of more than 3 

percent, compared with a decline of less than 1 percent in the rest of the United States. 

 COAL-FIRED POWER PLANT RETIREMENTS: Coal-fired generation capacity has fallen by around 

18 percent since 2005, while natural gas-fired generation capacity has risen more gradually by 

around 4 percentage points per year on average over the decade of analysis. Appalachia 

contains less than 20 percent of the operating coal-fired generation capacity in the four NERC 

regions surrounding it. However, over 40 percent of the retired coal-fired capacity can be 

found in Appalachia. 

THE REGIONAL ECONOMIC IMPACT OF ELECTRIC POWER PLANTS: We estimate the economic impact of 

electric power plants on regional economies using regression analysis with data from all counties in the 

13 Appalachian states that contained any electric power generation capacity during any year between 

2005 and 2015. In particular, we estimate wage and salary income in a county as a function of the coalfired electric power generation capacity and the natural gas-fired electric power generation capacity in 

the county. Results are as follows: 

 We are able to statistically identify a positive effect of coal-fired electric power generation 

capacity on wage and salary income in a county. 

 We estimate that the effect of coal-fired electric power generation capacity on wage and 

salary income is relatively large for small population counties, but that the effect diminishes to 

zero for sufficiently large population counties. 
6 

 Our estimates of the magnitude of the effect of a coal-fired power plant shutdown range 

dramatically. For illustrative purposes, in the one extreme, we estimate that the shutdown of a 

large coal-fired power plant in a small county can lead to a loss of around two-thirds of the 

county’s wage and salary income. In contrast, for a mid-size plant shutdown in a mid-size 

county, we estimate that the plant shutdown reduces wage and salary income by around 5 

percent. 

 We are not able to statistically identify an effect of natural-gas fired electric power generation 

capacity on county-level wage and salary income. 

RISK FACTOR ANALYSIS FOR COAL-FIRED GENERATION RETIREMENTS AND REPOWERINGS: We use data on 

57 coal-fired unit retirements in the Appalachian Region to inform a stochastic dynamic programming 

model to identify three primary and three secondary risk factors that shorten the economic lifetime of 

a coal-fired generating unit. Primary risk factors are those where a 5 percent change results in a 

greater than 5 percent decrease in the economic lifetime of the unit. Secondary risk factors are those 

where a 5 percent change results in a 1 to 5 percent decrease in the economic lifetime of the unit. We 

also identify factors that have very little influence on the economic lifetime of a coal-fired unit. 

 Primary risk factors include a high fixed cost of generation, low cost of retiring the unit, and a 

low discount rate used by utilities in decision-making. These primary risk factors are influenced 

by a variety of drivers including construction costs, land values, macroeconomic factors, and 

whether the unit is in a regulated market. 

 Secondary risk factors include low fuel efficiency, low generation responsiveness, and 

low/stable generation revenues. These secondary risk factors are influenced by a variety of 

drivers including age, capacity factor, ramp rate, and electricity markets. 

 Coal prices have very little influence on the retirement decision due to the prevalence of longterm coal contracts in the electricity generation industry. The insensitivity of the retirement 

decision to coal prices suggests that there is little that the coal industry could do to delay the 

recent spate of coal-fired plant retirements. It also suggests that government intervention in 

the coal industry that lowers delivered coal prices or adds stability to the coal market would 

have little to no impact on retirement decisions. 
7 

Chapter I: An Overview of the Electric Power 

Industry in Appalachia 

Electric Power Generation

ELECTRICITY GENERATION: We begin with an overview of electric power generation in Appalachia with 

special attention given to coal-fired generation. In Figure 1 we report overall electric power generation 

in the U.S., by region. As illustrated, Appalachian counties produced around 515 terawatt hours of 

electricity in 2015. This is down from production of 610 terawatt hours in 2005, representing a 

decrease of 15 percent. This compares to an increase of nearly 3 percent in the U.S. outside 

Appalachia. Expressed another way, Appalachian production amounted to around 13 percent of total 

national electric generation in 2015, which is down from nearly 15 percent in 2005. This compares to 

the nearly 8 percent of the U.S. population that lived in Appalachia in 2015. 

Figure 1: Electricity Generation, Appalachia and U.S.
8 

FUEL CONSUMPTION—ELECTRIC POWER GENERATION: Here we consider fuel consumption in electric 

power generation. As illustrated in Figure 2, coal is by far the largest fuel source for electric power 

generation in Appalachia. As of 2015, coal was the source fuel for more than 53 percent of electric 

generation in Appalachia. However, this figure has fallen significantly over the past decade. 

Importantly, over the past decade natural gas as a fuel source has risen to more than 16 percent of 

electric generation, up from only around 2.6 percent. Nuclear and renewables have also risen over the 

period of analysis as a source of electric power generation in Appalachia. In Figure 3 we report the 

source fuel for electric power generation nationally. Nationally we see less reliance on coal and 

hydroelectric and more reliance on natural gas and wind. 

Figure 2: Fuel Consumption for Electric Power Generation, Appalachia
9 

Figure 3: Fuel Consumption for Electric Power Generation, U.S. Excluding Appalachian Counties

 
10 

Electric Power Sector Employment

EMPLOYMENT BY REGION: Next we turn to employment in the electric power sector. In Figure 4 we 

report total employment across geographic areas for electric power generation. Most noticeably, total 

electric power employment has fallen considerably over the period of analysis across both geographic 

areas as total electric generation is down and as the industry has become more capital intensive. 

However, employment declined to a greater degree in Appalachia, falling from just over 50,000 

workers to about 48,500, a decline of more than 3 percent, compared with a decline of less than 1 

percent in the rest of the United States. 

Figure 4: Employment in Electric Power Generation 
11 

EMPLOYMENT BY COUNTY: In Figure 5 we report the change in employment in the electric power 

generating and distribution industries by county between 2005 and 2015. The figure reports data for all 

counties within the 13 Appalachian states, with the Appalachian Region highlighted in blue. Among the 

262 counties in the 13 Appalachian states—including those counties outside of the ARC designation—

that had a noticeable change in employment (a gain or loss of 50 or more jobs), 106 saw employment 

gains while 156 saw employment losses. Within Appalachia, employment losses were concentrated in 

the northern states, particularly in New York, Pennsylvania, and West Virginia. 

Figure 5: Employment Change in Electric Power Generation by County, 2005-2015
12 

Electric Power Plants 

OVERALL GENERATION CAPACITY: Coal is playing a smaller role in electricity generation today than at 

any time since World War II and its shrinking role has accelerated over the last five years. This national 

trend is especially prominent in Appalachia. In Figure 6 we report the total electric power generation 

capacity in the 13 Appalachia states for coal-powered and natural gas-powered generators. Consistent 

with the figure above, as of 2015 coal-fired capacity far exceeded that of natural gas by around a 

factor of four. However, coal-fired generation capacity has fallen by more than 18 percent since 2005 

while natural gas-fired generation capacity has risen by around 28 percent during the same period. 

Figure 6: Coal and Natural Gas Power Plant Capacity, 13 Appalachia States
13 

COAL-FIRED GENERATION RETIREMENTS: Each year since 2009, an increasing number of coal-fired 

units in Appalachia were retired, as reported in Figure 7. Since 2011, roughly 15,000 MW of coal-fired 

capacity were retired in Appalachia. This is roughly a quarter of the current coal-fired capacity still 

operating in Appalachia. These units used an average of over 1.5 million tons of mostly bituminous coal 

annually. In 2015 alone, more than 6,000 MW of coal-fired generation capacity was retired; more than 

double any previous year. 

Figure 7: Retired Coal-Fired Generating Units and Capacity in Appalachia

COAL FIRED ELECTRIC POWER GENERATION LOCATIONS: In the following figures, we report electric 

power generation plants within Appalachia that used either coal, natural gas, or both coal and natural 

gas as fuel anytime between 2005 and 2015. Overall, there were 127 electric power plants that 

operated in Appalachia at some point between 2005 and 2015, spread over 86 counties. In Figure 8 we 

report any changes that have occurred between 2005 and 2015 in coal-fired electric power generation 

in Appalachia. Out of 72 coal-fired power plants operating any time during the period, 42 (nearly 60 

percent) continued using coal, 22 (more than 30 percent) were retired, seven switched to another fuel, 

and only one was a new plant. Of the seven power plants that switched fuels, five permanently 

repowered to natural gas. 
14 

Figure 8: Change in Use of Coal in Electric Power Generation, 2005-2015
15 

NATURAL GAS FIRED ELECTRIC POWER GENERATION LOCATIONS: In Figure 9 we report changes that 

have occurred between 2005 and 2015 in natural gas electric power generation in Appalachia. Out of 59 

natural gas power plants operating any time during the period, 47 (80 percent) continued using natural 

gas, 10 (17 percent) were new, and only two were retired. Of the 10 new power plants, five were 

repowered coal-fired power plants. 

Figure 9: Change in Use of Natural Gas in Electric Power Generation, 2005-2015
16 

Chapter 2: Regional Economic Impact of Electric 

Power Plants in Appalachia 

In this chapter we econometrically estimate the effect of the loss of an electric power generation 

facility on county economic outcomes. We use a panel of county-level data for all counties in the 

Appalachian states that had some electric power generation capacity during any year between 2005 

and 2015—157 counties in total. Altogether, we rely on 1,727 observations for our econometric 

estimates—157 counties times 11 years. 

DEPENDENT VARIABLE: We consider total wage and salary income in each county as the measure of 

economic activity in that county. We specifically focus on wage and salary income (as opposed to total 

personal income) in order to abstract from transfer income and various sources of capital income so 

that our model is more reflective of current economic activity. 

INDEPENDENT VARIABLES: Our two key explanatory variables are the coal-fired electric power 

generating capacity and natural gas-fired electric power generation capacity in a given county. Countylevel data on power plant employment are not available but we assume that capacity is a good proxy of 

employment and other power-plant-specific variables that would capture the economic presence of the 

power plant in the county. We chose capacity as the proxy rather than generation, as employment at a 

plant is relatively fixed by the level of capacity and does not vary considerably with plant utilization. 

INTERACTION EFFECTS: We consider the possibility that the effect of a power plant on county-level 

economic outcomes may depend on the size of the county. As such, we include county population as a 

control variable as well as an interaction term between coal-fired electric generating capacity and 

county population.1

 Our model is summarized in the equation below. 

Wage and Salary Incomei,t = β0 + β1 Coal Fired Generating Capacityi,t + 

β2 Coal Fired Generating Capacityi,t * Populationi,t + β3 Natural Gas Fired Generating Capacityi,t

+ β4 Populationi,t + β5 Ci + β6 Tt + εit, 

where C and T represent county and year fixed effects to control for unobserved county- and yearspecific heterogeneity, and εit is a typical error term.2

 Summary statistics are reported in Table 1. 

 

1 We also considered a parallel interaction effect on natural gas fired capacity but our results did not indicate that 

this specification was appropriate. 

2 We did not include any additional county-level variables (e.g., urban/rural) as such typical county-level 

characteristics are often highly correlated with the county fixed effects. 
17 

Table 1: Summary Statistics 

Variable Mean Median Std.Dev.

Wage and Salary Income (000s) 1,846,163 582,952 3,128,754

Coal‐Fired Generation Capacity (Megawatt) 902 514 972

Natural Gas‐Fired Generation Capacity (Megawatt) 300 0 584

Population (Persons) 184,765 92,634 241,770

Source: Authors' calculations

REGRESSION RESULTS: The results of our regression model are reported in Table 2. Results indicate 

that coal-fired electric power generation capacity in a county is related to wage and salary income in 

the county and, indeed, that the effect depends on county population. In general, we find that the 

effect of coal-fired generation capacity is relatively high for small population counties, but that the 

effect diminishes to zero as counties grow larger. This result is likely reflective of the idea that as 

county population grows larger, a given size coal-fired power plant is a relatively smaller part of the 

county’s economy and its effect is therefore more difficult to identify statistically. To explain further, 

our statistical methods are able to identify the effect of a coal fired power plant in a county with, say 

10,000 residents, but these methods are not sophisticated enough to be able to disentangle the effect 

of a power plant in New York City from the tremendous amount of surrounding economic activity. In 

contrast, results do not identify a statistically significant relationship between natural gas-fired 

generation capacity and wage and salary income in a county. This may be due to a lower labor intensity 

at natural gas-fired plants, which would translate into a lower broader economic impact in the county. 

Alternatively, this lack of statistical significance may simply be the result of far fewer natural gas-fired 

power plants in our dataset, making statistical inference more difficult. 
18 

Table 2: Regression Results 

Variable Wage and

Salary Income

Coal‐Fired Generation Capacity (Megawatt)

88.148 ***

(23.522)   

Natural Gas‐Fired Generation Capacity (Megawatt)

10.160   

(19.791)   

Population (000s)

5.277 ***

(0.468)   

Coal‐Fired Generation Capacity* Population ‐0.0007 ***

(0.0001)   

Constant

72,993   

(74,708)   

R‐squared 0.999   

Source: Authors' calculations      

ESTIMATED EFFECT OF SHUTDOWN: To consider the above regression results more fully, recall that 

we estimate that the effect on a county’s wages of a one-megawatt increase in coal-fired generation 

capacity is $88,000 - $0.0007*county population. This finding indicates that power plant capacity has a 

diminishing effect on a county’s total wages as population rises. In Figure 10 we illustrate the 

magnitude of this effect across two dimensions. First, we consider this for mid-size counties versus 

small counties. We do not consider large counties since our estimated effect diminishes to zero for 

large counties.3

 Second, note that our estimated coefficient reflects the effect of a one-megawatt 

change in capacity. Therefore, to approximate the effect of a complete shutdown, we multiply our 

estimated effect by the total capacity of a mid-size plant versus a large plant. 

 

3 Technically our estimated effect becomes negative for sufficiently large counties. However, this is undoubtedly 

the result of a forced linearization within our model. 
19 

Figure 10: Estimated Effect of a Coal-Fired Power Plant Retirement 
20 

Chapter 3: Risk Factor Analysis of Coal-Fired 

Generation Retirements and Repowerings in 

Appalachia 

In this chapter we develop and estimate a real options model (Dixit and Pindyck 1994) to assess the risk 

factors for future power plant retirements (see Appendix A for a description of the real options model). 

To populate this model, we use a dataset of plant-level variables based on data from EIA forms 860 and 

923. The data include all coal-fired power plants in Appalachia and surrounding North American 

Electric Reliability Corporation (NERC)4

 regions (see Figure 11 for a map of the NERC regions 

considered). A detailed description of this dataset is provided in Appendix C. 

Figure 11: Appalachia and Surrounding NERC Regions
21 

Our risk analysis focuses on coal-fired units in Appalachia that retired or repowered from coal to 

another fuel source between 2011 and 2015. Appalachia has experienced a disproportionate number of 

coal-fired unit retirements. Even though Appalachia contains less than 20 percent of the operating 

coal-fired generation capacity in the four surrounding NERC regions, Appalachia accounts for over 40 

percent of the retired coal-fired capacity. We identify two repowered units and 59 retired units that 

used coal as their stated main energy source for generation5

 and have a primary-purpose North 

American Industry Classification System (NAICS) code of 22: electric power generation, transmission, 

and distribution. See Figure 12 for a map showing the location and capacity of these units. Focusing on 

NAICS code 22 eliminates a small number of units that produce electricity but are primarily industrial 

rather than suppliers to the electric grid. For example, the U.S. Alliance Coosa Pines coal plant retired 

in 2008 but its sole purpose was to provide electricity for a paper plant. Retirement decisions for these 

units will differ greatly from units that generate electricity to sell exclusively on a wholesale 

electricity market. 

The 59 units that we consider represent about 55 percent of all coal-fired units with NAICS code 22 

that have retired in Appalachia between 2011 and 2015.6

 Of these 59 units, 43 were in deregulated 

electricity markets (PJM) and 16 were in a regulated market (Southern Company, TVA, Duke Power). 

The 59 units were distributed across 21 different power plants. A list of plants included in our 

retirement risk analysis is reported in Table 3. 

 

5 Coal includes anthracite, bituminous, lignite, subbituminous, waste, refined, and coal-derived synthesis gas. 6 The remaining units were excluded due to data limitations. 
22 

Figure 12: Coal-Fired Generating Units in Appalachia and Surrounding NERC Regions, 2011-2015

 
23 

Table 3: Coal-Fired Power Plants that Retired Between 2011 and 2015 

Plant State Owner Balancing Authority

Total nameplate

capacity retired

(MW)

Average age

of unit when

retired

Gorgas AL Alabama Power Co. Southern Company 250 64

Widows Creek AL Tennessee Valley

Authority

Tennessee Valley

Authority 1969 59

Big Sandy KY Kentucky Power Co PJM Interconnection,

LLC 816 46

Dale KY East Kentucky Power

Coop, Inc

PJM Interconnection,

LLC 54 61

GMMM Westover NY AEE 2, LLC

New York Independent

System Operator

(NYIS)

119 63

Walter C Beckjord OH Duke Energy Ohio Inc PJM Interconnection,

LLC 1221 55

FirstEnergy

Ashtabula OH

American

Transmission Systems

Inc

PJM Interconnection,

LLC 256 57

Conesville OH Ohio Power Co PJM Interconnection,

LLC 162 50

Niles Power Plant OH Ohio Edison Co PJM Interconnection,

LLC 293 58

Muskingum River OH Ohio Power Co PJM Interconnection,

LLC 1529 57

Elrama Power Plant PA Duquesne Light Co PJM Interconnection,

LLC 510 59

FirstEnergy

Armstrong Power

Station

PA West Penn Power Co PJM Interconnection,

LLC 326 54

Hatfields Ferry

Power Station PA West Penn Power Co PJM Interconnection,LLC 1728 43

FirstEnergy Mitchell

Power Station PA West Penn Power Co PJM Interconnection,LLC 299 50

W S Lee SC Duke Energy

Carolinas, LLC Duke Energy Carolinas 180 63

John Sevier TN Tennessee Valley

Authority

Tennessee Valley

Authority 800 57

Clinch River VA Appalachian Power

Co

PJM Interconnection,

LLC 238 54

Glen Lyn VA Appalachian Power

Co

PJM Interconnection,

LLC 338 65

Philip Sporn WV Appalachian Power

Co

PJM Interconnection,

LLC 953 61

FirstEnergy Albright WV Monongahela Power

Co

PJM Interconnection,

LLC 278 59

Kammer WV Ohio Power Co PJM Interconnection,

LLC 713 57

Source: U.S. Energy Information Administration, Form EIA‐860 & EIA‐923
24 

CHARACTERISTICS OF RETIRED PLANTS: There are a variety of economic, regulatory, and technical 

factors that utilities consider when choosing to retire or repower a coal-fired unit. On average, units 

selected for retirement in Appalachia were smaller, older, less fuel efficient, more likely to burn 

bituminous coal, and more likely to be located in a regulated electricity market compared with the 

operating fleet of coal-fired units in the Region. The average fuel cost of retired units is approximately 

16 percent less than that of operating units, while capacity factors are 12 percent lower. This suggests 

that fuel costs were not a primary consideration in retirement decisions but units with greater 

unutilized capacity were at greater risk of retirement. Environmental considerations also appear to 

have influenced retirement decisions prior to 2015. Coal-fired units in a state with a Renewable 

Portfolio Standard were nearly 13 percent more likely to be retired. Retired units in Appalachia also 

emit far more SO2, NOx, and CO2 per MWh generated than the fleet of operating units. These trends 

persist outside the Appalachian Region with one exception: average fuel costs of retired units were 

slightly higher than the average operational unit outside of Appalachia. This suggests that fuel costs 

may have been a more prominent concern for unit owners outside of Appalachia. 

Table 4 compares operating coal-fired units to coal-fired units that have been retired or are planning 

to be retired. Due to larger capacity, units in Appalachia use more coal on average than the average 

unit outside of Appalachia. Coal-fired plants in Appalachia also paid more per MMBtu of heat generated 

than other units in 2015. This is partially explained by the quality of coal used. Operating coal-fired 

plants in Appalachia are more likely to use bituminous coal than operating coal-fired plants in 

neighboring NERC regions. Bituminous coal has a higher heat content than the sub-bituminous coal 

preferred by coal-fired plants outside Appalachia, but it is also more expensive. Bituminous coal is also 

more likely to have originated from mines in central and southern Appalachia. The bituminous coal 

preferred by units in Appalachia also has a higher sulfur and ash content. On average, coal-fired units 

in Appalachia emit more nitrogen oxides (NOx) and carbon dioxide (CO2) but less sulfur dioxide (SO2) 

than coal-fired units in neighboring regions. All of the coal-fired units in Appalachia have some form of 

pollution control technology in place. 
25 

Table 4: Coal-Fired Unit Retirements, 1993-2015 

  

Operating Conventional

Steam Coal Units Retired Coal Units Planned Coal UnitRetirements

Appalachia

Surrounding

NERC

Regions

Appalachia Surrounding

NERC Regions Appalachia

Surrounding

NERC

Regions

Number of Units 134 411 105 190 11 65

Total Nameplate Capacity (MW) 63,225 148,033 16,582 23,170 2,365 11,363

Avg. Nameplate Capacity (MW) 472 360 158 122 215 175

Avg. Capacity Factor (%) 38 40 33 30 22 24

Avg. Fuel efficiency  

(MMBtu output/MMBtu input) 0.38 0.33 0.32 0.32 0.32 0.33

Avg. Age (years) 45 44 59 59 57 54

% Single Ownership 69 83 88 93 100 97

% in State with RPS 54 55 61 65 18 66

% Regulated 57 53 65 58 100 76

% Use Bituminous Coal 78 52 98 83 100 49

% Pulverized Coal 87 89 73 78 100 91

Avg. SO2 Emission Rate

(tons/MWh) 0.00111 0.00142 0.01006 0.00901 0.00315 0.00294

Avg. NOx Emissions Rate

(tons/MWh) 0.00089 0.00089 0.00315 0.00305 0.00106 0.00113

Avg. CO2 Emissions Rate  

(short tons/MWh) 1.12 1.21 1.51 1.43 1.00 1.33

% with Emission Control

Technology 100 100 98 97 100 100

Avg. Quantity of Fuel (tons) 2,602,880 2,371,218 1,556,942 728,776 394,869 1,060,481

Avg. Sulfur Content (%) 2.10 1.30 2.24 1.36 1.05 0.95

Avg. Ash Content (%) 12.68 7.40 11.50 8.64 10.38 6.69

Avg. Fuel Cost (2015$/MMBtu) 2.66 2.47 2.22 2.59 2.71 2.42

Source: U.S. Energy Information Administration, Form EIA‐860 & EIA‐923

FUTURE RETIREMENTS: As of 2015, 2,365 MW of coal-fired capacity in Appalachia were planned for 

retirement in the coming years. These units share many characteristics with the units that were retired 

prior to 2015. Units planned for retirement are larger, younger, and less polluting than the units 

retired prior to 2015, but they remain smaller, older, and more polluting than the operating fleet. 

Units planned for retirement are also less fuel efficient and have a lower capacity factor than those 

units that remain operating. All of these units planned for retirement are owned by a single entity, 

reside in a regulated electricity market, and use bituminous coal. The motivations that influenced 

retirements prior to 2015 will persist into the future in Appalachia. The one exception may be average 

fuel cost. While units retired prior to 2015 paid a lower delivered coal price than those units that 
26 

remained operational, the units planned for retirement after 2015 paid a slightly higher fuel price than 

the average unit in the operating fleet.

In addition to retirements, 38 coal-fired units in Appalachia and the regions applied to switch 

permanently from coal to another fuel source (repower) between 2011 and 2015. In most instances, 

utilities choose to retire or repower a few coal-fired units but keep the overall plant operating. 

However, in a few instances, the utility has chosen to retire every coal-fired unit at a plant. For 

example, the Tennessee Valley Authority (TVA) chose to retire all eight coal-fired units at its Widows 

Creek plant in Alabama between 2013 and 2015. 

Analytical Approach 

The real options approach utilizes stochastic dynamic programming to calculate an economic lifetime 

for each coal-fired unit. Economic lifetime represents how long the coal-fired units should remain in 

operation to maximize their expected value to the utilities that own and operate those units. 

According to the National Association of Regulatory Utility Commissioners, the expected engineered 

lifetime of a coal-fired unit is 40 years (O’Brien, Blau, and Rose 2004). This lifetime is an engineering 

estimate of the time it takes for the net present value of the unit (inclusive of capital costs associated 

with initial construction) to fall to zero. Once the net present value of operating the plant becomes 

negative, the unit is assumed to have reached the end of its economic life. 

Unlike engineering approaches that utilize discounted cash flow analysis, a real options approach 

accounts for the future uncertainty associated with coal and electricity markets. Uncertainty in future 

market conditions will cause firms to be more hesitant to make decisions that are difficult to reverse or 

adjust when new information arrives (Yang and Blyth 2007; Kellogg 2014). Coal-fired generation 

retirement is a classic example. Once it has been permanently retired, it is difficult (if not impossible) 

to restart a coal-fired unit if demand for the electricity produced by that unit unexpectedly increases 

or the price of the coal delivered to that unit unexpectedly falls. 

Future market uncertainty has two implications for the economic lifetime of coal-fired units. First, a 

coal-fired unit’s economic lifetime cannot be expressed in terms of years since utilities are unable to 

predict market conditions in the future. Instead, the economic lifetime of a coal-fired generating unit 

is characterized by a critical electricity price ܲா

∗. The coal-fired unit should remain in operation if 

electricity prices exceed ܲா

∗, but it should be immediately retired when electricity prices fall below this 

threshold. Second, economic lifetimes will exceed engineering lifetimes due to the hesitancy of 

utilities to engage in the irreversible retirement of coal-fired generation. This hesitancy explains why 

the average age of retired coal-fired units in Appalachia (59 years old) far exceeds the 40-year lifetime 

suggested from engineering economic studies. 
27 

We apply the real options model to each of the 57 retired units in our analysis to provide a measure of 

the economic lifetime (critical electricity price threshold) of each unit. See Appendix B for details of 

the data collection, parameter estimation, and solution procedure used to generate the critical 

electricity price thresholds. Means and standard deviations of all parameter estimates used in our 

analysis are included in Table 5.7

 While we investigate risk factors for each unit, we report averages of 

all unit-level parameter estimates to be concise. 

Table 5: Average of Parameter Values Used in Economic Lifetime Analysis 

Description Parameter Regulated Deregulated

Coal price rate of reversion (%) ݎ஼

12.9 9.35

(5.77) (4.31)

Coal price long‐run mean ($/MMBtu) ܲത

஼

3.02 2.83

(0.48) (0.29)

Coal price volatility (%) ߪ஼

8.35 10.13

(1.21) (5.63)

Electricity price rate of reversion (%) ݎா

0.27 0.86

(0.07) (0.75)

Electricity price long‐run mean

($/MMBtu) ܲത

ா

15.05 18.94

(0.86) (3.81)

Electricity price volatility (%) ߪா

17.55 22.78

(0.68) (6.68)

Responsiveness of unit supply to

changes in electricity price (MMBtu) ߚா

15,240 13,782

(3,801) (17,387)

Unit capacity (MMBtu) ݍ௣௔௖

199.91 236.25

(146) (179)

Quantity of coal used per MMBtu

generated (MMBtu) ߚ஼

3.08 2.92

(0.24) (0.36)

Average monthly fuel used (MMBtu) ݍത஼

865,037 922,336

(633,147) (859,896)

Discount rate (%) ߜ 9

Variable cost/unit of generation

2.35 ݒ (MMBtu$/(

Fixed costs ($) ܨ 17.58ݍത௖

Sunk Costs ($) ܵ 590,500ݍ௣௔௖

Source: Authors' calculations

Note: Standard deviations are in parentheses.

 

7 All measures of electric power in this chapter have been converted to measures of heat output using the U.S. 

Energy Information Administration’s standard conversion factor of 1 KWh equals 3,412 Btu. 
28 

The first six rows in Table 5 describe the average future expectations for delivered coal and electricity 

prices for each of the 57 units in our analysis. The coal-fired units that retired in a regulated market 

experienced, on average, less volatile but higher coal prices than those in deregulated markets. The 

average long-run mean coal price is $3.02 per MMBtu for regulated coal units and $2.83 per MMBtu for 

the retired coal units in deregulated markets. Average coal price volatility is more than 21.3 percent 

higher in deregulated markets than regulated markets. Average coal price volatility is 8.4 percent for 

regulated markets and 10.1 percent for deregulated markets. The larger the percent volatility in a 

unit’s coal price, the more uncertainty the owner of that unit has about the future prices they will 

have to pay for fuel. While coal prices are more volatile (unpredictable) in deregulated markets, they 

revert back to the long-run mean 27.5 percent quicker than their counterparts in a regulated market. 

The average rate of reversion to the mean coal price across regulated coal units is 9.4 percent, 

compared with 12.9 percent for deregulated coal units. This suggests that while deregulated units are 

faced with more unpredictable coal prices, these unexpected shocks do not persist as long as the 

smaller shocks experienced by retired units in regulated markets. 

The coal-fired units that retired in a regulated market were paid, on average, lower but more 

predictable wholesale electricity prices than those in deregulated markets. The average long-run mean 

electricity price is $15.05 per MMBtu for regulated coal-fired units and $18.94 per MMBtu for the 

retired coal units in deregulated markets. The average electricity price volatility is much larger than 

the volatility in coal prices—17.6 percent for coal-fired units that retired in a regulated market and 

22.8 percent for those that retired in deregulated markets. On average, electricity prices revert back 

to the long-run mean much slower than coal prices—0.3 percent in regulated markets and 0.9 percent 

in deregulated markets. This suggests that much of the economic uncertainty that was facing retired 

coal-fired units was rooted in electricity markets and not coal markets. 

Rows seven through ten in Table 5 describe the generation technology associated with retired units. 

The average supply responsiveness of retired coal-fired units ሺߚாሻ captures whether the coal-fired unit 

was used for generating base load. Units devoted to supplying base load run continuously with little or 

no change in generation in response to market conditions. Supply responsiveness in a regulated and 

deregulated market is 15,240 and 13,782, respectively. This means that for every $1 per MMBtu 

increase in electricity prices, the quantity of electricity supplied increases by 15,240 and 13,782 

MMBtus.8

 Retired coal-fired units in our study were more responsive to price signals in the regulated 

markets. The average fuel efficiency for retired coal-fired units in our analysis is 3.1 for those in a 

regulated market and 2.9 in deregulated markets. This means that a 1 MMBtu increase in electricity 

requires 3.1 MMBtus of coal in a regulated market and 2.9 MMBtus of coal in deregulated markets. 

 

8 To put that number into context, it takes around 0.064 MMBtus to increase the temperature in a 1,600 square 

foot home with 10 feet ceilings by 50 degrees Fahrenheit. 
29 

Figure 13 shows the slope of the inverse production function for each unit mapped against the age of 

the unit when retired. The positive slope shows that younger generating units are more efficient. 

Figure 13: Coal-Fired Unit Fuel Efficiency by Age of Unit 

The last four rows of Table 5 provide the costs and discount rates used in our analysis. We are unable 

to estimate costs and discount rates for each unit due to a limited amount of publicly available 

information. Instead, we use a variety of previous studies and technical reports to provide feasible 

estimates of the costs considered when these coal-fired units were retired. Following Hepbasli (2008), 

we assume utilities use a 9-percent discount rate. 

The results of our coal-fired unit post-mortem analysis consist of measures of the economic lifetime of 

coal-fired units that retired in the Appalachian Region and the factors that shortened this economic 

life. The economic lifetime of a coal-fired unit is characterized by 1) recent coal and electricity prices 

facing a coal-fired unit and 2) a critical electricity price that would cause a utility to retire the coalfired generating capacity. These critical electricity price thresholds represent retirement rules 

provided each coal-fired unit forms expectations of future electricity prices and coal prices based on 

past prices. Given recent prices paid for delivered coal, a coal-fired unit has reached the end of its 

economic life if the price for electricity generated by that unit falls below its critical price threshold. 
30 

To illustrate our approach, consider the retirement decision for unit 1 at Widows Creek in Alabama, 

which retired in 2014. TVA (the owner/operator of Widows Creek) uses past prices and market 

knowledge to form expectations of future delivered coal prices and electricity prices at Widows Creek. 

These price expectations are characterized by a probability density function. Prices in the mass of the 

distribution are prices that TVA will most likely observe in the future. Prices in the tails of the 

distribution represent prices that are possible but unlikely. This density function changes over time to 

reflect 1) trends in the markets and 2) the recognition that near-term price forecasts will be more 

accurate than long-term price forecasts. Figure 14 presents a visual depiction of future expectations of 

coal and electricity prices at Widows Creek. Based on historic prices for coal delivered to Widows 

Creek, TVA expects future prices to be within a small interval around $2.61 per MMBtu. Based on 

historic prices for electricity generated at Widows Creek, TVA expects future prices to be around 

$15.22 per MMBtu but also recognizes that prices could drop to $5 or increase to more than $30. 

Figure 14: Expected Price and Three Monte Carlo Simulations of Price, Widows Creek 

Source: Authors’ calculations
31 

Based on the price expectations illustrated in Figure 14, the critical electricity price threshold for 

Widows Creek unit 1 is presented in Figure 15. If TVA observes electricity and coal prices above the 

price threshold, there is an economic incentive to continue operating Widows Creek unit 1. The price 

threshold is upward sloping since higher coal prices would require higher electricity prices for TVA to 

have an economic incentive to continue operating. If TVA observes electricity and coal prices below 

the price threshold, retiring the unit would maximize its value (discounted electricity profits) to TVA. 

Figure 15: Widows Creek Retirement Threshold 

The combination of historic average delivered coal price and wholesale electricity price for Widows 

Creek is identified by an “×” on the graph. If TVA were able to pay this historic average price for 

delivered coal and receive the historic average price for the electricity it generates, there is an 

economic incentive for Widows Creek unit 1 to remain in operation. However, these prices deviate 

from the historic average over time. The “○” indicates the combination of delivered coal and 

wholesale electricity prices when the unit was retired in 2014. At the point of retirement, the price 

paid for coal was only slightly higher than historic averages, but the wholesale price of electricity was 

more than 43 percent lower than historic averages. This drop in wholesale electricity price crossed the 

retirement threshold, causing unit 1 to transition from economically viable to a candidate for 

retirement. 

Keep coal‐fired unit in operation

Retire coal‐fired unit

Source: U.S. Energy Information Administration Form EIA‐860 and authors’ calculations
32 

As illustrated by the Widows Creek example, whether a coal-fired unit has reached the end of its 

economic life depends on whether recent coal and electricity prices fall below its retirement 

threshold. The economic lifetime of coal-fired units varies due to differences in the prices paid for 

delivered coal, the price received for electricity, and the location of a unit’s retirement threshold. To 

summarize the economic lifetime of each unit in our analysis, Table 6 categorizes each of the retired 

coal-fired units into three categories. The first category are those units with a strong economic case 

for retirement. These units were experiencing coal and electricity prices that had recently (within the 

previous one to two years) fallen below their retirement threshold. The second category are those 

units with a very strong economic case for retirement. These units were experiencing coal and 

electricity prices that had been below their retirement threshold for many years. The third category 

are those units with a weak economic case for retirement. Coal and electricity prices prior to 

retirement were not below the economic retirement threshold. For these units, the decision to retire 

was either 1) more influenced by non-economic drivers (changes in policy or regulatory regimes) or 2) 

based on expectations of future market conditions that were inconsistent with historic market 

conditions. For instance, the owners and operators of many of the units with a weak economic case for 

retirement cite impending Mercury and Air Toxics Standards (MATS) as a justification for retirement. 

While all retirement decisions are driven by both economic and policy considerations, those units with 

a weak economic case for retirement are likely more influenced by the latter. 

Table 6: Economic Case for Coal-Fired Generating Unit Retirement 

Plant State Unit Age

(years)

Capacity

(MW)

Pollutants

controlled

Economic case

for retirement

Big Sandy KY 2 46 816 NOx, PM very strong

Dale KY 1 61 27 NOx, PM very strong

      2 61 27 NOx, PM very strong

Walter C. Beckjord OH 1 60 115 PM strong

      2 60 113 PM strong

      3 59 125 NOx, PM very strong

      4 56 163 NOx, PM very strong

      5 52 245 NOx, PM very strong

      6 45 461 NOx, PM very strong

FirstEnergy Ashtabula OH 5 57 256 None strong

Conesville OH 3 50 162 NOx, PM weak

Niles Power Plant OH 1 58 133 NOx, PM,

SO2 weak

      2 58 133 NOx, PM weak

Muskingum OH 1 62 220 NOx, PM strong

      2 61 220 NOx, PM strong

      3 58 238 NOx, PM weak

      4 57 238 NOx, PM weak

      5 47 615 NOx, PM strong

continued on the next page

 
33 

Plant State Unit Age

(years)

Capacity

(MW)

Pollutants

controlled

Economic case

for retirement

Elrama PA 1 62 100 NOx, PM,

SO2 strong

      2 61 100 NOx, PM,SO2 weak

      3 60 125 NOx, PM,SO2 weak

      4 54 185 NOx, PM,SO2 strong

FirstEnergy Armstrong PA 1 54 163 NOx, PM very strong

      2 53 163 NOx, PM very strong

Hatfields Ferry   PA 1 44 576 NOx, PM,

SO2 very strong

      2 43 576 NOx, PM,SO2 very strong

      3 42 576 NOx, PM,SO2 very strong

FirstEnergy Mitchell   PA 3 50 299 None weak

Clinch River VA 3 54 238 NOx, PM weak

Glen Lyn VA 5 71 100 NOx, PM very strong

      6 58 238 NOx, PM weak

Philip Sporn WV 2 65 153 NOx, PM very strong

      3 64 153 NOx, PM strong

      4 63 153 NOx, PM very strong

      5 52 496 None strong

FirstEnergy Albright    1 60 69 None strong

      2 60 69 None strong

      3 58 140 None very strong

Kammer WV 1 57 238 NOx, PM weak

      2 57 238 NOx, PM weak

      3 56 238 NOx, PM strong

Gorgas AL 6 64 125 NOx, PM very strong

      7 63 125 NOx, PM very strong

Widows Creek AL 1 62 141 NOx, PM strong

      2 62 141 NOx, PM very strong

      3 61 141 NOx, PM very strong

      4 61 141 NOx, PM very strong

      5 59 141 NOx, PM strong

      6 60 141 NOx, PM very strong

      7 54 575 NOx, PM,SO2 very strong

      8 50 550 None very strong

W S Lee SC 1 63 90 NOx, PM weak

      2 63 90 NOx, PM strong

John Sevier TN 1 57 200 NOx, PM very strong

      2 57 200 NOx, PM very strong

      3 58 200 NOx, PM very strong

      4 57 200 NOx, PM very strong

Source: U.S. Energy Information Administration, Form EIA‐860 and authors’ calculations
34 

More than 80 percent of the coal-fired capacity that retired between 2011 and 2015 have a strong or 

very strong economic case for retirement—including all but one of the units in regulated markets. 

Thirteen units have a weak economic case for retirement meaning that recent coal and electricity 

prices remain slightly above the retirement threshold. Potential changes to environmental policy 

(particularly the MATS rule) or regulatory considerations likely combined with economic forces to 

incentivize the retirement of these units. Note that the economic case for retirement can vary even 

within a plant. Since all units at a plant pay the same price for delivered coal and receive the same 

price for electricity, these differences are driven entirely by within-plant differences in the location of 

the retirement threshold. These differences in retirement thresholds are in turn driven by features of 

the individual units at the plant. 

Risk Factors 

Using the results from our model described above, we can identify risk factors for retirement by 

undertaking a sensitivity analysis that allows us to determine which factors shortened the economic 

lifetime of each coal-fired unit. The sensitivity analysis uncovers a set of primary and secondary risk 

factors. We then discuss the economic, regulatory, and technical considerations that will drive each 

risk factor. Figure 15 illustrates how this decision is generated by instantaneous factors (coal and 

electricity prices at a point in time), and a retirement threshold that takes account of the full 

spectrum of costs and benefits associated with operation and retirement of coal-fired generation and 

the generation technology associated with a particular unit. As expected, declining wholesale 

electricity prices and rising fuel costs encourage retirement. However, the factors that shift a coalfired unit’s retirement threshold are less clear. 

We can identify these factors by utilizing a sensitivity analysis. Specifically, we determine the impact 

of changes in coal price expectations, electricity price expectations, fuel efficiency of the generating 

unit, and supply responsiveness on the unit. For each parameter listed in Table 5, we find the percent 

change in the retirement threshold when we increase the parameter value by 5 percent holding all 

other parameters constant at the values in Table 5. Figure 16 shows the results of our sensitivity 

analysis categorized by direction of the parameter change. Parameter changes that increase the 

critical electricity price are risk factors for retirement since they make retirement more likely. 
35 

Figure 16: Effect of a 5-Percent Change in Each Factor on Coal-Fired Unit Retirement Threshold 

This sensitivity analysis allows us to categorize the importance of the risk factors we find in the model. 

We define primary risk factors as those where a 5 percent change in conditions results in a greater than 

5 percent increase in the critical retirement threshold. Secondary risk factors are those where a 5 

percent change results in a 1 to 5 percent increase in the critical retirement threshold. Each risk factor 

may be influenced by multiple economic and technological drivers. Risk factors and associated drivers 

are detailed below and summarized in Figure 17. 
36 

Figure 17: Primary and Secondary Risk Factors for Coal-Fired Unit Retirement 

Source: Authors’ analysis of real-options model results 

Primary Risk Factors 

HIGH FIXED COST OF COAL-FIRED GENERATION: The fixed costs associated with operating a coal-fired 

unit are equal to the capital costs. Capital costs are payments a utility must make to finance the initial 

fixed expenses incurred to purchase land and generation equipment and build the generation facilities. 

Three main drivers determine these capital costs. The first is the initial construction cost. The more 

costly it is to build a coal-fired unit, the larger the fixed costs of operation and the greater the risk of 

retirement. The second is the cost of financing. Financing costs are driven by a variety of factors but 

one that is particularly germane to financing coal-fired plants is the time-to-build. Constructing a coalfired unit takes time and the longer the time to complete construction, the more it costs to finance 

construction. The third driver is the cost of any upgrades. Due to their age (the average age of 

operating coal-fired units in Appalachia is 45 years), many utilities are forced to make investments to 

upgrade components of the generation technology. Older units with more investments in upgrades will 

carry a larger fixed cost of generation and a higher risk of retirement. 

One prominent upgrade in the electric power industry is investments in pollution control technologies. 

Fifty out of the 57 units in our analysis have some form of pollution control technology installed to 
37 

control particulate matter (PM), nitrogen oxides (NOx), or sulfur dioxide (SO2). These technologies add 

to the fixed cost of generation. Because utilities are more likely to retire a plant that is more costly to 

operate, more investments to meet current pollution regulations increase the risk of retirement. 

However, this positive relationship between pollution control investment and retirement does not hold 

for regulations that have not yet been enacted. Prior to 2016, many utilities retired coal-fired units 

without mercury control technologies to avoid the costly investments needed to meet MATS. According 

to AEP and TVA annual reports, investment needed to meet the MATS requirement can run up to $400 

million. Thus, new pollution control regulations (such as MATS) will increase the risk of retirement for 

units that are not currently in compliance. 

LOW RETIREMENT COSTS: Retirement costs depend on the level of decommissioning and the need to 

offset lost generation. Thus, units with a smaller nameplate capacity are more likely to be retired due 

to the less costly retirement these units allow. In fact, the average nameplate capacity of retired coal 

units in the Appalachian Region is 67 percent smaller than operational units. However, this risk factor 

can be broken down into multiple drivers. 

There is no legal requirement to demolish an old coal-fired power plant. The lack of a minimum level 

of decommissioning leaves utilities three options. The first option is to undertake decommissioning 

before the land is sold for redevelopment or converted to another generation technology such as a 

natural gas combined-cycle plant. The costs associated with decommissioning depend on the quantity 

of asbestos and regulated materials, the presence or absence of ash impoundments, local labor 

markets, proximity to salvage and scrap markets like steel and copper, and the means and methods of 

demolition. A second option is to sell the plant to developers as-is in exchange for a lower purchase 

price. However, the lower the purchase price, the higher the retirement costs. A strong local real 

estate market will lower retirement costs by commanding a higher sale price for the land and facilities 

and/or allowing utilities to engage in less decommissioning. If decommissioning costs are high and the 

local real estate market is weak, utilities may choose a “no action” option and simply accumulate the 

retired facilities. The accumulation of retired assets on a company’s balance sheet creates different 

costs through the introduction of financial risk and a drag on earnings. 

Utilities may also be able to lower retirement costs by passing these costs onto shareholders or 

obtaining government grants and tax breaks to decommission and redevelop sites and create jobs. In 

states that are deregulated, utility shareholders must pay the cost of decommissioning. However, in 

states that are still regulated, decommissioning costs could be passed on to ratepayers. Since those 

making the retirement decision do not incur the cost of decommissioning, we should expect a greater 

risk of retirement in regulated markets. This finding is supported in Figure 15473 where there was a 

strong or very strong economic case for retirement for all but one unit in regulated markets. 

Decreasing costs of alternative generation technologies (particularly natural gas) can also work to 

lower retirement costs. If a utility must offset lost coal-fired generation, then a decrease in the cost of 
38 

building and operating other generation technologies will increase the risk of coal-fired retirement. For 

example, the oft-cited decline in natural gas prices will lower the cost of coal-fired retirement by 

lowering the cost of offsetting the lost coal-fired generation. How much natural gas prices influence 

the retirement decision depends on how much of the retired coal-fired generation will be replaced. If a 

utility does not plan to make new investments in natural gas generation and its gas-fired units are 

operating at near capacity, natural gas prices will play a small role in the retirement decision. But if 

the utility must replace the retired capacity with new gas-fired capacity or currently own gas-fired unit 

that are currently operating well below capacity, then the decline in natural gas prices will influence 

the retirement decision. 

DISCOUNT RATE USED BY UTILITY IS LOW: Because retirement decisions involve costs and benefits 

that accrue at different times, utilities must use a discount rate to compare these payoffs. There is no 

definitive rule for selecting a discount rate. Firms should choose a discount rate that is at least as large 

as the firm’s financial cost of capital since this represents the opportunity cost of tying up funds in 

coal-fired generation. The opportunity cost of investing in coal-fired generation is the value of 

alternative investments that utilities could make with those funds, and is closely linked to 

macroeconomic conditions. During economic downturns, returns from alternative investments are 

lower. This suggests that the recent economic downturn in the United States may have partially 

contributed to retirement decisions. 

However, firms may choose discount rates that exceed their financial cost of capital to reflect an 

intolerance for financial risk. Firms in regulated markets are able to pass on capital costs to 

ratepayers, effectively eliminating financial risk (IEA 2003). These utilities could finance investments in 

coal-fired generation at interest rates close to government debt yields. Compared to utilities in 

regulated markets, utilities in deregulated markets use higher discount rates to evaluate coal-fired 

investments due to the risk they face in competitive markets (IEA 2003). The degree to which a 

deregulated utility will increase their discount rate beyond government debt yields is determined by 

the degree to which the risk associated with coal-fired generation is correlated with the larger 

economy. Financial risk considerations suggest that coal-fired units in regulated markets are at a 

greater risk of retirement. 

Secondary Risk Factors 

UNIT’S FUEL EFFICIENCY IS LOW: Two main factors determine the fuel efficiency of a coal-fired unit: 

age and utilization. Older coal-fired units tend to be less fuel efficient than newer units. The older 

technologies in these older units were generally less efficient when they were installed. Fuel efficiency 

also degrades over time. The oldest retired unit in our analysis could generate 0.2 MMBtu per MMBtu of 

heat input at retirement. Some of the newest coal-fired units in our study could generate 0.4 MMBtu 

per MMBtu of heat input when retired. Fuel efficiency also tends to be lower at very low or very high 
39 

levels of utilization (Campbell 2013). Thus, units with a very low or very high capacity factor will tend 

to be less efficient and at a greater risk of retirement. 

LOW RESPONSIVENESS OF UNIT GENERATION TO CHANGES IN ELECTRICITY PRICES: Historically, coalfired units were used to generate base load. This role did not require generation to respond to 

changing electricity market conditions. However, the ability to adjust generation (either by load 

following or switching between on-off modes) in response to changing market conditions is becoming 

more valuable to utilities as gas-fired units take over baseload generation. One prominent measure of a 

unit’s ability to respond to changing market conditions is the unit’s ramp rate. Ramp rate is the 

increase or decrease in generation per minute. Utilities can improve ramp rates by installing 

distributed control systems. Another measure is the minimum amount of time required to bring the unit 

to full load from shutdown. Units that require substantial time to switch between on and off modes 

and/or units with small ramp rates will be less able to respond to changing market conditions and will 

be at greater risk for retirement. 

EXPECTED GENERATION REVENUES ARE LOW AND STABLE: Utilities are more likely to retire a plant if 

they expect generation revenues at that plant to be low in the future. Expectation of future generation 

revenues are captured by the long-run mean electricity price received for electricity generated by a 

unit and the volatility of that electricity price. A lower long-run mean electricity price implies lower 

generation revenues and a greater risk of retirement. Decreases in electricity price volatility add 

certainty to these low revenue forecasts. This certainty makes utilities more willing to make large 

irreversible investments like retiring a coal-fired unit. Thus, units in markets with large amounts of 

volatility in electricity prices are at less risk of retirement than those units in stable markets. 

Coal prices have very little influence on the retirement decision (this is also evident from the flat 

retirement thresholds). While the primary cost of generation is the cost of purchasing fuel, the prices 

for delivered coal are relatively low and stable for the coal-fired units in our study. This can be 

explained by the prevalence of coal contracts. According to the EIA-923 database, all of the 57 units in 

our analysis used coal contracts to supply their stock of fuel before they retired. Long-term contracts 

typically afford utilities lower and more stable prices in exchange for less flexibility in choosing 

suppliers and contract terms. The insensitivity of the retirement decision to coal prices suggests that 

there is little that the coal industry could do to delay the recent spate of coal-fired plant retirements. 

It also suggests that government intervention in the coal industry that lowers delivered coal prices or 

adds stability to the coal market would have little to no impact on retirement decisions. These 

retirement decisions are driven by factors outside the coal market such as real estate markets, 

construction costs, and electricity markets. 
40 

Repowered units 

Repowered units are those coal-fired units that make a non-transitory change in generation technology 

away from coal. This does not include units that can use multiple fuels and periodically switch between 

fuels. We use a two-step approach to identify if and when a coal-fired unit repowered. In step one, we 

identify those units that plan to repower. Beginning in 2007, the Form EIA-860 began providing a space 

for firms to identify planned changes from the primary energy source used to produce electricity. Each 

year we identified generating units within Appalachia and the surrounding NERC regions that reported 

“planned energy source 1” changes. In step two, we cross-referenced these planned energy source 1 

changes with the actual listed planned energy source 1 in each year. Several units are listed with 

planned energy source changes over multiple years and several planned energy source changes did not 

actually occur. This second step allows us to confirm a planned energy source change actually took 

place and identify the year the change occurred. 

We identified 38 coal-fired units in Appalachia and the surrounding NERC Regions that applied to switch 

permanently from coal to another fuel source between 2011 and 2015. However, 33 units either 

withdrew their application to repower, delayed repowering until after 2016, or retired the unit instead 

of repowering.9

 Of the five remaining units that repowered prior to 2015, all five repowered from coal 

to natural gas, and only two were in the Appalachian Region. These five units are listed in Table 7. 

The limited number of repowered units hinders identifying risk factors for repowering using the 

methods we adopted for retirement. With 17 units planned for repowering as of 2015, a more formal 

analysis of risk factors associated with repowering may be possible in the coming years. Regardless, 

repowered units seem to share many characteristics with retired units. Specifically, the few repowered 

units we observed had a smaller nameplate capacity, smaller annual capacity factor, and lower fuel 

efficiency compared with operational units. Repowered units were also more likely to be under single 

ownership. This is consistent with previous research in the area (Knittel et al. 2015). Similar to the 

retired units, the two repowered units in the Appalachian Region were also older than the average age 

among operational units. However, the three repowered units in surrounding NERC regions were, on 

average, more than 5 years younger than the average age of operational coal-fired units. 

Repowered units differ from retired units with respect to fuel costs. The average fuel cost before 

retirement in the ARC and surrounding NERC regions is $2.22 and $2.59 per MMBtu, respectively, 

compared with $3.92 and $3.08 per MMBtu for repowered units. Additional insights can be found by 

looking at how these units were used after repowering. We revisited each repowered unit in 2015 after 

they began to use natural gas as their primary fuel source. The nameplate capacity did not change 

 

9 As of 2016, there are still ten units in the ARC Region and seven units in surrounding NERC Regions that list plans 

to retire in Form EIA-860. 
41 

after repowering any of these units. However, the average annual capacity factor for four out of the 

five units was lower after repowering. A lower capacity factor is characteristic of load-following or 

peaking units that adjust generation in response to load demand. Thus, baseload coal-fired units that 

were marginally profitable or even loss centers for utilities were converted to load-following and 

peaking units. This suggests that lower fuel prices may not be the only motivation for repowering. A 

need for greater generation flexibility may also be influencing repower decisions. The one unit that did 

experience an increase in capacity factor after repowering was in the Appalachian Region. 
Table 7: Coal-Fired Units that Repowered to Natural Gas After 2011 

Plant

Name

Unit

ID State Appalachia Region Repower From Repower To Year Re‐ powered Nameplate Capacity (MW)

2 years prior to

repowering 

Net

Generation

(MWh)

Capacity

Factor

Hunlock 3 PA yes waste coal natural gas 2011 49.9 141,748 32.40% 

NRG Dover COG1 DE no bituminous natural gas 2013 18 63,197 40.10% 

Yates 6 GA no bituminous natural gas 2015 403.7 825,809 23.40% Yates 7 GA no bituminous natural gas 2015 403.7 427,273 12.10% 

W S Lee 3 SC yes bituminous natural gas 2015 163.2 30,597 2.10% 
 43

Conclusion 

We find no single factor driving the increase in coal-fired plant retirements in Appalachia. Instead, the 

increase in coal-fired plant retirements is due to a confluence of factors. Lower natural gas prices are 

often cited as the root of the increase in retirements. However, lower prices alone would not have 

triggered such an increase in retirements if coal-fired units in Appalachia were younger. Instead, we 

highlight six primary and secondary risk factors and discuss the economic, technical, and regulatory 

changes that would influence each of these risk factors. The three primary risk factors are a large fixed 

cost of generation, small cost of retirement, and a low discount rate used by the utility for decision 

making. A strong local land market, large investments made to mitigate pollution emissions, high 

financing costs, and whether the unit is in a deregulated market are all likely drivers of these risk 

factors.
 44

Appendix A: Real Options Model for Economic 

Retirement of Coal-Fired Generation 

An operating electricity generating unit10 receives a flow payoff 

ߨሺܲா, ܲ஼ሻ ൌ ൫ܲாሺݐሻݍாሺݐሻ െ ܲ஼ሺݐሻݍ஼ሺݐሻ െ ݍݒாሺݐሻ െ ݍܨ௣௔௖൯																											ሺ1ሻ

where ܲாሺݐሻ is the wholesale electricity price received for the electricity generated by the unit, ܲ஼ሺݐሻ

is the price of coal delivered to the unit, ݒ is the variable operating and maintenance (O&M) costs of 

electricity generation, and ܨ is the fixed levelized capital cost associated with the unit. ݍா ൌ ߚாܲா ൏

ݍ ௣௔௖is the quantity of electricity supplied by the unit with generation capacity ݍ ൐ ௣௔௖0 and ߚா ൐

0. ݍ ஼ൌ ߚ஼ݍா is the quantity of coal used to generate ݍா with ߚ ൐ ஼1. This relationship between ݍ ஼and 

ݍா captures the generation technology of a specific generating unit with newer and more fuel efficient 

units requiring less fuel to generate an additional unit of electricity (ߚ ஼closer to 1). 

Current electricity prices and coal prices are known with certainty by the owner of the generating unit. 

However, future prices are subject to unpredictable fluctuations in the electricity and coal markets 

and will be unknown to unit operators. For example, prices paid for the firm's on-site stock of coal are 

known, but future prices of coal will be determined by the spot market or coal delivery contracts that 

have not yet been established. Future coal price uncertainty can be somewhat mitigated by purchasing 

coal on long-term contracts. Thus, generating units that utilize long-term coal contracts will be less 

exposed to coal price uncertainty than units that purchase coal on the spot market. Pindyck (1999) 

utilizes a century’s worth of data to conclude that coal prices return to a long-run average following a 

market shock. Following Pindyck, future coal prices are treated as a random variable and assumed to 

evolve according to geometric mean reversion (GMR), 

݀ܲ஼ ൌ ݎ஼ሺܲത

஼ െ ܲ஼ሻܲ஼݀ݐ ൅ ߪ஼ܲ஼݀ݖ																																												஼ሺ2ሻ

where	ܲത

஼ is the long-run average (mean) coal price, ݎ ஼is the rate of reversion to the average coal 

price, ߪ ஼is the standard deviation rate, and ݀ݖ ஼ൌ ߳ሺݐሻ√݀ݐ is the increment of a standard normal 

Weiner process. The first term on the right-hand side captures the deterministic trend in coal prices 

while the second term captures volatility or random shocks in the coal market. For example, an 

exceptionally cold winter or hot summer will temporarily increase electricity usage and coal demand. 

This unexpected shock will manifest itself in the coal market as an unexpected increase in the price of 

coal. By not reaching zero in any finite time (Karlin and Taylor, 1981), geometric mean reversion (GMR) 

prevents any negative coal prices. The rate of reversion to the mean, the long-run mean coal price 

 

10 A generating unit contains all the equipment needed to produce electricity and typically operates 

independently. Electric power plants can include multiple generating, which can use different fuels. For that 

reason, we conduct our analysis at the unit level. 
 45

level, and the standard deviation rate are all allowed to vary by unit to capture differences across 

units in the types of coal used, the cost of transporting coal, and regional differences in coal demand. 

Unexpected shifts in supply and demand also influence the prices units receive for the electricity they 

produce. For example, electricity demand is sensitive to weather conditions since weather variations 

lead to large variations in heating and cooling demand. Electricity supply is subject to uncertainty 

surrounding entry of new and exit of old generating capacity. Uncertainty on both the supply and 

demand side of electricity markets introduces volatility into electricity prices (Joskow 2007). To 

capture this uncertainty in electricity prices, electricity prices evolve randomly around a long-run 

mean following a geometric mean-reverting process: 

݀ܲா ൌ ݎாሺܲത

ா െ ܲாሻܲா݀ݐ ൅ ߪாܲா݀ݖா																																												ሺ3ሻ

The mean reverting process captures the flat load demand in many parts of the country in recent 

years. Similar to the coal price process, the parameters that govern the stochastic electricity price 

process are allowed to vary by unit to capture regional differences in regulated and unregulated 

electricity markets. 

Based on expectations of future coal and electricity prices, a unit may choose to retire a coal-fired unit 

at some point in the future. Retirement instantaneously eliminates the flow payoff ߨሺܲா, ܲ஼ሻ at some 

sunk retirement cost, ܵ.11 Retirement costs can vary widely depending on the level of decommission. 

Retirement costs may be minimal if the site can be maintained in its current condition with minimal 

cleanup needed to meet environmental compliance12 and ensure safety. In contrast, full 

decommissioning requires substantial sunk costs associated with dismantling all equipment, 

demolishing structures, and site cleanup including wet and dry disposal areas and coal yards. In 

summary, while the unit is operating, it produces electricity ݍாሺݐሻ ൐ 0 using coal ݍ஼ሺݐሻ ൐ 0 with costs 

ݍݒாሺݐሻ ൅ ݍܨത஼, which generates a flow of profits. If the unit is retired, it produces no electricity and 

uses no fuel but incurs a sunk retirement cost: ݍாሺݐሻ ൌ 0, ݍ஼ሺݐሻ ൌ 0, ܨ ൌ 0, and ܵ൐0. 

The decision problem is presented in terms of a risk-neutral utility whose objective is to determine if 

and when to retire, ݐோ, a generating unit to maximize the utility's expected discounted profits net of 

any sunk retirement costs and subject to any grid stability constraints that must be met to in the 

 

11 Following Baumol and Willig (1981), we define sunk cots as costs that cannot be eliminated even by terminating 

electricity generation. In contrast, fixed costs are costs that are not reduced by decreases in generation so long as 

generation is not discontinued altogether. Thus, not all sunk costs are fixed and not all fixed costs are sunk. 

12 Environmental compliance includes adhering to the EPA's Interstate Air Pollution Transport Rule, National 

Emissions Standards for Hazardous Air Pollutants regulations, the industrial waste rule for fossil fuel combustion 

waste, the Cooling Water Intake Structures rules of the National Pollutant Discharge Elimination System, the Steam 

Electric Power Generating Effluent Guidelines and Standards, and the most recent Mercury and Air Toxics 

Standards.
 46

process of retiring coal-fired capacity. Using traditional discounted cash-flow analysis, the utility would 

retire the coal-fired unit when the expected net present value of generation profits is less than the 

cost to retire the unit. However, since the costs associated with retirement are sunk, there is an 

incentive (the option value) to delay retirement longer than suggested by discounted cash-flow 

analysis. This option value captures the economic value to a utility from being able to respond to new 

information about coal and electricity markets. The size of this option value is key to determining the 

timing of coal-plant retirements and will vary by unit depending on coal and electricity market 

conditions, the efficiency of the coal-fired generation technology currently being utilized, and the sunk 

costs required to retire. 

At each instant in time, the utility must determine whether to continue operating the coal-fired unit or 

retire it. Given the discount rate ߜ, the optimal retirement time satisfies the following: 

ܸ൫ܲாబ, ܲ஼బ൯ ൌ max ௧ೃ

ܧ቎ ଴න ߨ൫ܲாሺݐሻ, ܲ஼ሺݐሻ൯

௧ೃ

଴

݁ିఋ௧݀ݐ൛ ൅ ܸ൫ܲாሺݐோሻ, ܲ஼ሺݐோሻ൯ െ ܵൟ݁ିఋ௧ೃ቏					ሺ4ሻ

subject to ݀ܲா, ݀ܲ஼, ܲாబ ൌ ܲாሺ0ሻ, and ܲ஼బ ൌ ܲ஼ሺ0ሻ. The evaluation at each instant in time maximizes the 

expected profits from coal-fired generation from that point forward by making a choice to continue to 

generate electricity using coal (whose payoff is defined as ܸ) or to retire and incur ܵ. 

Dixit and Pindyck (1994) show that the retirement decision can be specified as an optimal stopping 

problem. Treating retirement as an optimal stopping problem will ensure the retirement decision 

maximizes the value of the coal-fired generation asset. While the unit is operating, it not only provides 

a flow of profits ߨሺܲா, ܲ஼ሻ, but it also means the utility holds an option to retire the unit when market 

conditions deteriorate ܸሺܲா, ܲ஼ሻ. This option value represents the value of delaying retirement to gain 

more information about the profitability of continuing to use the coal-fired unit. When the utility 

retires the unit, sunk retirement costs ܵ are incurred and the option value is terminated - making it an 

additional opportunity cost of retirement. This opportunity cost causes a more cautious response by the 

utility in the face of uncertainty. 

The utility’s unknown value function can be found by employing stochastic dynamic programming with 

the following Hamilton-Jacobi-Bellman (HJB) equation: 

ߜܸሺܲா, ܲ஼ሻ ൒ ߨሺܲா, ܲ஼ሻ ൅ ݎாሺܲത

ா െ ܲாሻܲா

߲ܸሺܲா, ܲ஼ሻ

߲ܲா

൅ ݎ஼ሺܲത

஼ െ ܲ஼ሻܲ஼

߲ܸሺܲா, ܲ஼ሻ

߲ܲ஼

൅

1

ாߪ 2

ଶܲாଶ ߲ଶܸሺܲா, ܲ஼ሻ

߲ܲா

ଶ

൅

1

஼ߪ 2

ଶܲ஼ଶ ߲ଶܸሺܲா, ܲ஼ሻ

߲ܲ஼

ଶ 																																																													ሺ5ሻ

and the value matching condition: 
 47

ܸሺܲா, ܲ஼ሻ ൒ ܵ																																																														ሺ6ሻ

In financial terms, the utility faces an obligation to a flow of profits and option value before 

retirement. The obligation is treated as an asset whose value ܸሺܲா, ܲ஼ሻ must be optimally managed (i.e. 

maximized). The left-hand side of the HJB equation is the return the utility would require to delay 

retiring the coal-fired unit over the time interval ݀ݐ. The right-hand side of the HJB equation is the 

expected return from delaying retirement of the coal-fired unit over the interval ݀ݐ based on 

expectations of future coal and electricity prices. This equation acts as an equilibrium condition 

ensuring a willingness to delay retirement prior to the time a retirement actually occurs. The value 

matching condition describes where the utility is indifferent between continuing to generate using the 

coal-fired unit and retiring the coal-fired unit. 

Either the HJB equation of value matching condition is satisfied at each point in the state space of 

ܲாሺݐሻ and ܲ஼ሺݐሻ. If the HJB equation holds as an equality, it is optimal to delay retirement of the coalfired unit. However, if the value matching condition holds as an equality, it is optimal to retire the 

coal-fired unit. The solution to the HJB equation and value matching condition can be characterized by 

a retirement threshold ܲா

∗

 that separates the state space where retirement should occur. Specifically, 

the retirement threshold is the set of points where the HJB and value matching conditions are met. If 

electricity prices are above this threshold, continuing to utilize the coal-fired unit will maximize value 

of that unit to the utility. If electricity prices fall below this threshold, the utility should retire the 

coal-fired unit. This retirement threshold is dependent on the cost of coal. Specifically, the higher the 

coal price, the larger the threshold electricity price that would optimally trigger retirement of the 

coal-fired unit ߲ܲா

∗

⁄߲ܲ஼ ൐ 0. 
 48

Appendix B: Parameter Estimation and Solution 

Procedure 

Electricity and Coal Price Expectations 

Estimating the economic life of a coal-fired unit requires defining utility expectations for future coal 

and electricity prices. In our model, these expectations are determined by equations (2) and (3) in 

Appendix A. To estimate the parameters in these equations, we assume utilities base expectations of 

future prices on the evolution of past prices. 

Coal price and quantity data for plants operating in regulated electricity markets (more than 70 

percent of the coal units in our analysis) comes from EIA's 923 database. This database includes 

information on monthly fuel receipts like the quantity and price of fuel delivered to the plant. Since an 

electricity plant can have more than one fuel delivery per month, we use a weighted average of the 

fuel-specific quantity and price delivered each month to compile monthly fuel quantities (in million 

British Thermal Units, MMBtu) and prices ($/MMBtu) for units in regulated electricity markets from 

2002 to 2015. Coal price data for plants in deregulated electricity markets are not publically available. 

We entered into a confidential data agreement with EIA to have access to the proprietary fuel cost 

data for plants in deregulated markets from 2002 through 2012. Because fuel deliveries are not 

associated with a unique unit, we apply the plant level parameter estimates for each retired unit at 

that specific plant. 

Utility expectations of electricity prices are calculated using historic data on wholesale electricity 

prices at each generating plant ($ per MMBtu). For deregulated retired coal units whose balancing 

authority is PJM, we use the hourly PJM zonal wholesale electricity price data to estimate expectations 

of electricity prices. For all other retired coal units (those in a regulated market and those in a 

deregulated market but outside PJM), we use Federal Energy Regulatory Commission (FERC) Form 714 

hourly system lambda electricity prices by balancing authority area. Since electricity price data are 

either at the balancing authority level or the PJM zone level, expectations for electricity prices are the 

same for units within the same balancing authority or PJM zone. 

For our purposes, correctly specifying expectations for future prices is akin to identifying and 

estimating a stochastic process that accurately captures the trends and volatility of historic coal and 

electricity prices facing each retired coal-fired unit. The correct stochastic process could be one where 

the price follows a random walk with drift, like geometric Brownian motion, or one where the price 

reverts to a trend, like geometric mean reversion. We use a unit root test to verify that the functional 

form assumption in equations 2 and 3 (geometric mean reversion) are consistent with the data. Unit 

root tests provide a platform to determine if a time series follows a random walk. Therefore, an 

augmented Dickey Fuller test is used to check the mean reversion assumptions for coal and electricity 
 49

prices. We reject the null hypothesis that both price processes follow geometric Brownian motion for 

each unit in the study and conclude that both price processes revert to a stationary long-run trend. 

With empirical support for our geometric mean reversion assumption, we follow Pachamanova and 

Fabozzi (2011) to estimate the long run trend in prices (ܲത

ா and ܲത஼), the speed of reversion to that trend 

(ݎா and ݎ(஼, and the volatility around that trend (ߪா and ߪ (஼using data from 2002-2015.13

Generation and Fuel Use 

Electricity supplied by a unit ࡱࢗ is assumed to follow a simple supply function. We utilize the EPA's 

Continuous Emission Monitoring Systems (CEMS) data on electricity quantity with electricity price data 

described above to calculate the slope of a linear generation supply curve for each of the retired units 

in our study. Aggregate hourly electricity price data is aggregated to a monthly level and used as a 

right-hand-side variable for the ordinary least squares regression: ݍா ൌ ߚாܲா ൅ ߝ. We suppress the 

constant so a unit would not supply electricity if the price of electricity is zero. 

An important factor for coal unit retirements is the age of the unit. We are able to account for the 

effect of age on retirement through ߚா. Because coal units are largely used to generate baseload 

electricity, owners of coal-fired units seek to minimize the cost of supplying this baseload. This means 

the quantity of electricity generated and the efficiency of the generation technology determines the 

amount of fuel used. To capture unit technology and efficiency, we use ordinary least squares 

regression to determine the fuel efficiency of each unit in our sample: ݍ ஼ൌ ߚ஼ݍா ൅ ߝ. Suppressing the 

constant recognizes that generation is impossible without a fuel source. This relationship is 

representative of an inverse production function. The higher ߚா the less efficient is the generating 

unit. 

Variable, Fixed and Sunk Costs 

In order to produce electricity, a firm faces fixed costs (e.g., capital costs, financing costs, land costs) 

and variable or O&M costs (e.g., fuel, labor, maintenance). While fuel costs are available at the plant 

level (see Electricity and Coal Price Expectations section above), plant-level data on payrolls, 

maintenance costs and capital costs are limited. According to the EIA, the average operating and 

maintenance expenses (less fuel) for fossil steam units between 2005 and 2015 is $2.35 per MMBtu. 

Faced with limited data on variable costs of generation, we apply this average measure to each unit in 

our study: ݒ ൌ 2.35. 

 

13 For the coal-fired units that retired from deregulated markets, we use the proprietary EIA 923 data ending in 

2012 to estimate expectations of future coal prices. We assume that coal price expectations do not substantially 

change for those handful of units that retire after 2012 where our proprietary data end. 
 50

The fixed costs associated with operating a coal-fired unit are equal to the levelized capital costs. A 

coal-fired unit that is still operating incurs these levelized capital costs over its productive life (until it 

retires). We take EIA estimates of the projected levelized capital costs for conventional coal 

generation resources in 2019 (provided in the Annual Energy Outlook) and transform it into dollars per 

MMBtu. We calculate per unit levelized capital costs to be $17.58 per MMBtu. Each unit's fixed costs are 

found by multiplying the per unit levelized capital cost by size of the unit (proxied by average annual 

coal used). 

There is little public information on the sunk costs required to retire a coal-fired unit due to their 

proprietary nature. A report by the Electric Power Research Institute (EPRI) places costs required to 

decommission a coal-fired plant at $108,000 per MW of capacity (Henson 2004). However, the level of 

decommissioning can vary. If the site is going to be reused for other operations at the power plant, 

decommission includes removal of equipment and hazardous materials associated with generation. If 

full remediation is necessary, the cost and extent of hazardous material cleanup depends on the 

anticipated reuse of the site and the type and location of hazardous materials stored or disposed on 

the property. If this is the only or last generating unit at the plant, then coal ash ponds or solid waste 

landfills must follow federal and state permit requirements before closure. In some instances, the 

utility can choose to leave the generating unit intact and maintain environmental permits or sell the 

facility as is. 

Decommissioning costs are only part of the costs incurred by a utility to retire a coal-fired unit. 

Utilities are often required to offset some of the generation capacity lost when a coal-fired unit is 

retired. According to Form EIA-860 data, the average construction cost per MW of natural gas-fired 

capacity installed in 2014 was $965,000. For exposition, we assume that each a utility must offset half 

of the generation lost when a coal-fired unit is retired. While there is little data linking coal-fired 

retirements to new investments in generation, there is reason to believe that utilities will not replace 

all of the retired coal-fired generation. The average capacity factor for existing natural gas plants in 

the ARC Region is less than 10 percent. This suggests that much of the retired generation capacity 

could be easily offset by increasing generation at existing gas-fired units. While coal-fired retirements 

can necessitate transmission improvements, power plant owners are typically not required to make 

these investments. This leaves us with the following relationship between a unit’s capacity and the 

sunk costs required to retire it: ܵ ൌ $108,000 ∗ ݍ ൅ ௣௔௖ଵ

 .௣௔௖ݍ ∗ $965,000 ∗ ଶ

Solution Procedure 

A closed-form solution for the retirement threshold does not exist. Instead, we utilize computational 

methods to approximate the value function associated with the decision to retire a coal-fired unit 

(Miranda and Fackler 2002). Using piecewise linear basis functions, we approximate the value function 

associated with retirement of each coal-fired unit that was retired between 2005 and 2015 over a 
 51

subset of the state space (Marten and Moore 2011). The approximation procedure solves for the 2ൈ݊ൈ

݉ basis function coefficients which satisfy the HJB equation and value matching condition at a set of 

݊ ൌ 50 and ݉ ൌ 150 nodal points spread evenly over the two-dimensional state space. Upwind finite 

difference approximations are used to construct a linear spline, which approximates the unknown value 

function. We use Matlab along with the CompEcon Toolbox and the smoothing-Newton root finding 

method to solve the resulting complementarity problem. The approximated state space ranges from $0 

to $15 in the ܲ஼ dimension and from $0 to $150 in the ܲா dimension. Extending the state space in either 

the ܲ஼ or ܲா dimension or increasing the number of nodal points does not alter our general results. 
52

Appendix C: Plant Database Description and 

Additional Detail on Power Plants 

DATABASE DESCRIPTION: Much of the analysis presented in chapters 1 and 3 relies on a database of 

every electric generating unit in Appalachia and the surrounding NERC regions. Here we provide a more 

detailed description of this dataset and a comparison of the current fleet and recent trends in 

Appalachia to coal-fired units outside of Appalachia and other types of electricity generating units (for 

example natural gas units and wind turbines). 

A power plant houses multiple generators, which may differ in generation capacity, fuels used, age, 

and fuel efficiency. An analysis performed at the generator level provides a clearer picture of the role 

of coal in electricity generation in the Appalachian Region. This generator-level dataset draws from 

three main sources: Energy Information Administration (EIA) Form EIA-860 dataset, Form EIA-923 

dataset, and the Environmental Protection Agency’s Superfund Enterprise Management System (SEMS) 

database. By drawing from multiple datasets, we are able to provide plant and generator information 

in eight general categories: 

1. Plant name and location: Address, county, and balancing authority for each plant. This

category also contains dummy variables that indicate whether the plant is located in a county

that is within the ARC Region or in a state with a Renewable Portfolio Standard (RPS).

2. Plant information: Plant’s regulatory status, water source, transmission or distribution system,

and presence of natural gas pipelines and ash impoundments.

3. Generator information: Generator’s operating company, operating status, ownership, and year

of first operation.

4. Generation technology: Description of generation technology, prime mover (for example

hydroelectric turbine, steam turbine), capacity (nameplate, summer, and winter), average

heat input and gross load, average annual capacity factor, and fuel efficiency.

5. Fuel and cost data: energy sources, startup sources, quantity of fuel used, quality of the fuel

used, fuel price, and primary mode of fuel delivery (for example pipeline or rail)

6. Ancillary technologies employed by the generator: Dummy variables indicating the presence

or absence of a variety of technologies.

7. Retirement and modifications: Month and year of unit retirement or planned retirement,

years of repower and planned repower, original and new primary fuel sources for those units

that repowered.

8. Emissions: Average emissions of SO2, NOx, and CO2. Description of pollution control

technologies for SO2, NOx, particulate matter, and mercury.
 53

MORE DETAIL ON COAL-FIRED POWER PLANTS: Table 8 presents characteristics of the electricity 

generating fleet operating in the counties that constitute Appalachia and the surrounding area. As of 

2015, there were 1,094 electric generating units operating in Appalachia with a total nameplate 

capacity of 132,284 megawatts (MW). These units are large with an average nameplate capacity (120 

MW) that is 72 percent larger than the average nameplate capacity in the four NERC regions that 

border Appalachia.14 

Table 8: Characteristics of the U.S. and Appalachian Electric Generating Fleet, 2015 

  

Operating Conventional

Steam Coal Units Retired Coal Units Planned Coal UnitRetirements

Appalachia

Surrounding

NERC

Regions

Appalachia

Surrounding

NERC

Regions

Appalachia

Surrounding

NERC

Regions

Number of Units 1,094 7,565 240 2,183 134 411

Total Nameplate Capacity (MW) 132,284 529,658 33,186 235,415 63,225 148,033

Average Nameplate Capacity

(MW) 121 70 138 108 472 360

Average Capacity Factor (%) 24 16 8 14 38 40

Average Fuel efficiency 0.34 0.30 0.30 0.28 0.38 0.33

Average Age (years) 35 31 15 23 45 44

% Single Ownership 87 89 89 85 69 83

% in state with RPS 43 66 37 58 54 55

% Regulated 63 64 51 80 57 53

Source: U.S. Energy Information Administration, Form EIA‐860 & EIA‐923

In Appalachia, coal-fired units are less likely to be owned by a single entity and more likely to be 

located in a state with a renewable portfolio standard (RPS) compared with other types of generating 

units such as gas-fired or nuclear generators. Coal-fired units currently operating are also older and 

slightly more efficient than the gas-fired units. However, gas-fired units are not inherently less 

efficient than coal-fired units. Instead, the relative inefficiency of the gas-fired units reflects how 

natural gas plants have traditionally been used. Historically, coal was the least expensive way to 

generate electricity in Appalachia. Because of this cost-advantage, coal-fired plants were designed to 

supply base load, meaning that these units would run continuously with little or no change in 

generation in response to daily or seasonal variation in electricity demand. Many natural gas plants 

were designed to only generate electricity when demand outstripped the baseload being generated by 

 

14 These NERC regions include the Northeast Power Coordinating Council (NPCC), Reliability First (RF), SERC 

Reliability Corporation (SERC), and the Southwest Power Pool (SPP). 
 54

coal plants. This role, known as load-following, means natural gas plants in Appalachia are often 

cycling between little or no generation and maximum capacity. This difference between baseload coal 

plants and load-following natural gas plants is evident in the difference in average capacity factor 

between the two types of units. Capacity factor is the ratio of actual annual electrical energy output to 

the maximum annual electrical energy output. Intermittently cycling between periods of low and high 

generation results in an 8 percent capacity factor for gas-fired units compared with a 38 percent 

annual capacity factor for coal-fired units. This intermittent cycling is also less efficient as more 

energy is needed to increase generation than is need to maintain a constant flow of generation. 

Regardless of these differing roles, the coal-fired units currently operating in Appalachia are relatively 

efficient. The average capacity factor of coal-fired units in Appalachia and the surrounding NERC 

regions are similar suggesting that baseload generation is the primary role of coal-fired units in both 

areas. However, the heat rate (the ratio of energy output to energy input) of the average coal-fired 

unit in Appalachia is 0.38 compared with 0.33 in the surrounding NERC regions. This means that coalfired units in Appalachia generate more electrical energy per unit of coal than similar units in 

surrounding areas. The coal-fired units in Appalachia are more efficient than base load units in 

surrounding areas despite being over a year older on average. The slight edge in fuel efficiency could 

be a result of the quality and cost of coal used in Appalachia. On average, the coal delivered to units in 

Appalachia is more expensive and has a higher sulfur and ash content than coal delivered to units in 

surrounding areas. The higher cost alone creates an incentive to adjust plant operations or make 

upgrades to improve efficiency. Federal regulations on sulfur emissions and the cost of managing and 

disposing of ash creates additional incentives to unit owners in Appalachia to make efficiency 

improvements. 

REPLACEMENT ELECRIC POWER GENERATION – NATURAL GAS AND WIND: Most of the generation 

capacity lost due to coal-fired retirements will likely be replaced by increasing generation at existing 

natural gas plants in Appalachia and wind turbines from surrounding areas. Figure 18 shows that the 

spate of coal-fired unit retirements was preceded by a drastic increase in gas-fired generation capacity 

both within Appalachia and in surrounding regions. Between 2000 and 2003, roughly 25,000 MW of gasfired capacity was added to the grid in Appalachia. These gas-fired units have an average capacity of 

145 MW which is comparable to the average size of the retired coal-fired units. This expansion in the 

early 2000s allowed natural gas to account for more than a quarter of generation capacity in 

Appalachia. However, much of this gas-fired generation capacity is underutilized. The average annual 

capacity factor for gas-fired generating units in the ARC Region is only 8.2 percent. This is far lower 

than the capacity factors for existing coal-fired units (38%) and slightly lower than gas-fired units 

outside the ARC region (14%). Given flat and even declining load demand in the ARC Region and the low 

capacity factors for gas-fired units, the expansion of natural gas capacity in the ARC Region could 

easily offset the baseload generation lost when coal-fired units were retired. Gas-fired units will likely 
 55

continue to play their traditional load-following role given the amount of gas-fired capacity added to 

the grid. 

These trends are not unique to Appalachia. In the surrounding NERC regions, gas-fired generation 

expanded to an even greater degree in the early 2000s and persisted into recent years. Between 2000 

and 2003, roughly 100,000 MW of gas-fired capacity was added to the grid in the surrounding NERC 

regions. In 2015 alone, nearly 4,000 MW of gas-fired capacity was added in the same areas. This gasfired expansion was also coupled with a non-trivial increase in wind generation that has not occurred in 

Appalachia. 

Figure 18: Transition from Coal to Natural Gas and Wind by Year 

REPLACEMENT ELECRIC POWER GENERATION – REPOWERINGS: Coal-fired units are also being 

converted or repowered to natural gas though to a far lesser extent. Table 9 summarizes these 

repowerings between 1993 and 2015. Instead of building new gas-fired capacity to offset coal-fired 

losses, coal-fired unit owners may choose to convert the old coal-burning unit to operate using natural 

gas. On the surface, repowered units share many characteristics with retired units. Repowered units 

tend to be smaller, less fuel efficient, have a lower capacity factor and are more likely to be under 

single ownership than the operating fleet of coal-fired units. However, a small number of units that 
 56

have been repowered as of 2015 (two in Appalachia and three in surrounding NERC regions). This 

suggests repowering may be a viable option in a more limited set of circumstances. In the surrounding 

NERC regions, the average repowered unit was younger than the fleet of operating coal-fired units. The 

average capacity factor of those units planned for repower in the surrounding NERC regions is also 

higher than the fleet of operating coal-fired units. Outside of Appalachia, coal-fired unit owners may 

be more likely to undertake repowering on younger baseload coal-fired units. However, these 

conclusions are based on a limited number of observations. There is also no guarantee that those units 

planned for repower will actually be repowered. 

Table 9: Coal-Fired Unit Repowerings, 1993-2015 

  

Operating Conventional

Steam Coal Units Retired Coal Units Planned Coal UnitRetirements

Appalachia

Surrounding

NERC

Regions

Appalachia

Surrounding

NERC

Regions

Appalachia

Surrounding

NERC

Regions

Number of Units 134 411 2 3 10 7

Total Nameplate Capacity (MW) 63,225 148,033 213 825 1,730 2,106

Average Nameplate Capacity

(MW) 472 360 107 275 173 301

Average Capacity Factor (%) 38 40 17 25 14 42

Average Fuel efficiency 0.38 0.33 0.25 0.31 0.32 0.32

Average Age (years) 45 44 57 37 57 46

% Single Ownership 69 83 100 100 60 100

% in state with RPS 54 55 50 33 70 14

% Regulated 57 53 100 100 30 100

Source: U.S. Energy Information Administration, Form EIA‐860 & EIA‐923

 
57

Terms and Abbreviations 

Term Definition 

MMBtu 

Million British thermal units. Btu is a measure of heat output 

required to raise the temperature of 1 pound of liquid water by 1 

degree Fahrenheit. It is used to measure the heat produced when 

fossil fuels are burned for power generation. 

MW Megawatts. A measure of electric generating capacity. Equal to 1 

million watts, or 1,000 kilowatts. 

MWh Megawatt-hour. A measure of electricity production or consumption. 

Equal to one megawatt operating for one hour. 

Abbreviation Definition 

EIA U.S. Energy Information Administration 

MSHA U.S. Mine Safety and Health Administration 

BLS U.S. Bureau of Labor Statistics 

QCEW Quarterly Census of Employment and Wages, implemented by the 

U.S. Bureau of Labor Statistics 

NERC North American Electric Reliability Corporation 
58

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