Electricity: Significant Changes Are Expected in Coal-Fueled Generation, but Coal is Likely to Remain a Key Fuel Source
Released: 2012-11-28T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Coal is a key domestic fuel source and an important contributor to the U.S. economy. Most coal produced in the United States is used to generate electricity. In 2011, 1,387 coal-fueled electricity generating units produced about 42 percent of the nation's electricity. After decades of growth, U.S. coal production and consumption have fallen, primarily due to declines in the use of coal to generate electricity.

According to the Environmental Protection Agency (EPA), using coal to generate electricity is associated with health and environmental concerns such as emissions of sulfur dioxide, a pollutant linked to respiratory illnesses, and carbon dioxide, a greenhouse gas linked to climate change. In response to recent environmental regulations and changing market conditions, such as the recent decrease in the price of natural gas, power companies may retire some units, which could affect the coal fleet's generating capacity--the ability to generate electricity--and the amount of electricity generated from coal. Power companies may also retrofit some units by installing controls to reduce pollutants.

GAO was asked to examine (1) how the fleet of coal-fueled electricity generating units may change in the future in terms of its generating capacity and other aspects and (2) the future use of coal to generate electricity in the United States and key factors that could affect it. GAO conducted a statistical analysis of plans for retiring coal-fueled units, interviewed stakeholders, and reviewed information on industry plans and long-term forecasts by EIA and others. GAO is not making any recommendations in this report.

section_title: What GAO Found
paragraphs: Retirements of older units, retrofits of existing units with pollution controls, and the construction of some new coal-fueled units are expected to significantly change the coal-fueled electricity generating fleet, making it capable of emitting lower levels of pollutants than the current fleet but reducing its future electricity generating capacity. Two broad trends are affecting power companies' decisions related to coal-fueled generating units--recent environmental regulations and changing market conditions, such as the recent decrease in the price of natural gas. Regarding retirements, forecasts GAO reviewed based on current policies project that power companies may retire 15 to 24 percent of coal-fueled generating capacity by 2035--an amount consistent with GAO's analysis. GAO's statistical analysis, examining data on power companies that have announced plans to retire coal-fueled units, found that these power companies are more likely to retire units that are older, smaller, and more polluting. For example, the units companies plan to retire emitted an average of twice as much sulfur dioxide per unit of fuel used in 2011 as units that companies do not plan to retire. Based on the characteristics of the units companies plan to retire, GAO estimated additional capacity that may retire. In total, GAO identified 15 to 18 percent of coal-fueled capacity that power companies either plan to retire or that GAO estimated may retire--an amount consistent with the forecasts GAO reviewed. Regarding retrofits, the coal-fueled generating fleet may also become less polluting in the future as power companies install controls on many remaining units. Regarding new coal-fueled units, these are likely to be less polluting as they must incorporate advanced technologies to reduce emissions of regulated pollutants. Coal-fueled capacity may decline in the future as less capacity is expected to be built than is expected to retire.

According to stakeholders and three long-term forecasts GAO reviewed, coal is generally expected to remain a key fuel source for U.S. electricity generation in the future, but coal's share as a source of electricity may continue to decline. For example, in its forecast based on current policies, the Energy Information Administration (EIA) forecasts that the amount of electricity generated using coal is expected to remain relatively constant through 2035, but it forecasts that the share of coal-fueled electricity generation will decline from 42 percent in 2011 to 38 percent in 2035. Available information suggests that the future U.S. use of coal may be determined by several key factors, including the price of natural gas and environmental regulations. For example, available information suggests that the price of coal compared with other fuel sources will influence how economically attractive it is to use coal to generate electricity. EIA assessed several scenarios of future fuel prices and forecasts that coal's share of U.S. electricity generation will fall to 30 percent in 2035 if natural gas prices are low or 40 percent if natural gas prices are high. In addition, some stakeholders told GAO that the future use of coal could be significantly affected if existing environmental regulations become more stringent or if additional environmental regulations are issued. For example, EIA forecasts that two hypothetical future policies that reduce carbon dioxide emissions from the electricity sector by 46 percent and 76 percent would result in coal's share of U.S. electricity generation falling to 16 and 4 percent in 2035, respectively.

EPA provided technical comments that were incorporated as appropriate.

section_title: Letter
paragraphs: Coal is a key domestic fuel source and an important contributor to the  U.S. economy. The United States has the largest recoverable coal  reserves in the world, according to the Energy Information Administration  (EIA). In 2011, about 86,200 workers around the country produced more  than 1 billion tons of coal, and more than 90 percent of this coal was used  to generate electricity in the United States. Also in 2011, there were  1,387 coal-fueled electricity generating units with a total of 317,469  megawatts (MW) of capacity—a measure of the ability to generate  electricity—about 30 percent of total generating capacity in the United  States. These coal-fueled units generated 42 percent of the nation’s  electricity in 2011. After decades of growth—peaking in 2008—U.S. coal  production has fallen, primarily due to declines in the use of coal to  generate electricity. Some stakeholders expressed concern, if this trend  were to continue, about the implications on electricity systems,  communities, and economies that rely on coal mining and coal-fueled  electricity.

Using coal to generate electricity has been associated with human health  and environmental concerns by the Environmental Protection Agency  (EPA), the primary federal agency responsible for implementing many of  the nation’s environmental laws. For example, according to EPA data,  coal-fueled electricity generating units are among the largest emitters of  sulfur dioxide (SO) and nitrogen oxides (NO), which have been linked to  respiratory illnesses and acid rain. EPA recently proposed or finalized  several regulations, as required or authorized, that aim to address certain  health or environmental impacts associated with coal-fueled electricity  generating units. In response to these regulations, power companies  might retrofit some units by installing controls to reduce pollutants or by  taking other steps to reduce adverse impacts. When it is not economic to  take these actions, power companies may retire some units, which could  affect coal-fueled generating capacity and the amount of electricity  actually generated from coal. We recently reported on the price and  reliability implications of key recent EPA regulations. In addition,  according to EPA data, coal-fueled electricity generating units emit large  quantities of carbon dioxide (CO per unit of electricity produced as  natural gas units in 2010. The National Research Council has stated  that emissions of CO emissions.

You asked us to examine the future use of coal to generate electricity.  Our objectives for this report were to examine what available information  indicates about: (1) how the nation’s fleet of coal-fueled electricity  generating units may change in the future in terms of its generating  capacity and other aspects and (2) the use of coal to generate electricity  in the United States in the future and key factors that could affect it.

To examine how the coal-fueled generating fleet may change, we used  data from Ventyx Velocity Suite, a proprietary database containing  consolidated energy and emissions data from EIA, EPA, and other  sources. We used data as of July 27, 2012, to describe characteristics of  coal-fueled electricity generating units and to provide information on  power companies’ plans to retire coal-fueled units and build new ones.  Such information reflects publicly reported plans as identified by Ventyx.  As plans may change, the actual number and characteristics of future  retirements and new construction of coal-fueled units may differ from  what is represented in Ventyx as of July 2012. To assess the types of  units that may be retired, we carried out a statistical analysis of units  owned by power companies that have announced plans to retire coal- fueled units. We analyzed various characteristics including characteristics  of the unit (i.e., size and age) and the characteristics of the power  company that owns the unit (i.e., whether it is traditionally regulated or  operates in a restructured market). We then examined units owned by  companies that have not announced any planned retirements in order to  estimate how many of those units companies may consider retiring. Our  statistical analysis did not examine the amount of electricity that may be  generated at coal-fueled units in the future. Appendix I provides further  information about our statistical analysis. To provide information about the  use of coal to generate electricity in the future and key factors that could  affect it, we reviewed forecasts from EIA, the International Energy Agency  (IEA) and IHS Global Insight,fueled electricity generation under different scenarios. Appendix II  summarizes the scenarios we examined. While long-term forecasts are  subject to inherent uncertainties, we found the EIA, IEA and IHS Global  Insight forecasts to be reasonable for describing what is known about the  potential future use of coal to generate electricity. To respond to both  objectives, we reviewed available literature, including studies by federal  agencies and research organizations, and summarized the results of  semistructured interviews with a nonprobability sample of 36  stakeholders. Stakeholders included representatives from power  companies, a coal company, and nongovernmental organizations, and  officials from federal and state agencies. We selected these stakeholders  to be broadly representative of differing perspectives on these issues  based on recommendations from agencies and industry associations,  along with other information. Because we used a nonprobability sample,  the views of these stakeholders are not generalizable to all potential  stakeholders, but they provide illustrative examples of views. To provide  information on recent electricity industry trends, we summarized historical  data from EIA. To assess the reliability of Ventyx and EIA historical data,  we reviewed existing documentation, interviewed Ventyx and EIA staff,  consulted with agency officials and other knowledgeable parties,  conducted some electronic testing, and compared data in Ventyx to  information obtained from several power companies and regional  transmission organizations. We determined the Ventyx and EIA data to  be sufficiently reliable for the purposes of this report. Some numbers in  this report have been rounded.   and summarized projections of coal- We conducted our work from July 2011 to October 2012 in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Background
paragraphs: Because of its abundance and historically low cost, coal is an important  fuel source in the United States, accounting for about 20 percent of total  energy use in 2011. Nearly all coal consumed in the United States is  produced domestically, and coal represents about 29 percent of all  domestically produced energy. U.S. coal production generally increased  since 1960 and reached its highest level in 2008. Advancements in  mining technology and a shift to using surface mines to a greater extent  than underground mines has boosted coal’s overall productivity and  enabled production to increase even as the number of workers  decreased. In 2011, half as many workers produced 24 percent more coal  than in 1985, as shown in figure 1. Data from the Bureau of Labor  Statistics indicate that about 86,200 people were employed in coal mining  in the United States in 2011.

In the United States, coal is primarily used to generate electricity—over  90 percent of coal was used to generate about 42 percent of electricity in  2011. The amount of electricity generated using coal has generally  increased since the 1960s, but decreased recently due to a combination  of a decline in overall electricity demand, shifts in the relative prices of  fuels, and other reasons. (See fig. 2.) Meanwhile, coal’s share of total  electricity generation has fluctuated over time. EIA has stated that several  factors, including low oil prices during the late 1960s—which served to  increase electricity generation from oil—and the oil price shocks of the  1970s have influenced the mix of fuel sources used to produce electricity.

Two broad trends—recent environmental regulations and changing  market conditions—are affecting power companies’ decisions related to  coal-fueled electricity generating units. Regarding environmental  regulations, as we have previously reported, since June 2010, EPA  proposed or finalized several regulations that would reduce certain  adverse health or environmental impacts, including impacts associated  with coal-fueled electricity generating units.potentially significant implications for public health and the environment.  One of the most significant regulations in terms of EPA’s estimated  benefits and costs, EPA’s Mercury and Air Toxics Standards, establishes  emissions limitations on mercury and other toxic pollutants. Mercury is a  toxic element, and human intake of mercury, for example, through  consumption of fish that ingested the mercury, has been linked to a wide  range of health ailments. In particular, mercury can harm fetuses and  cause neurological disorders in children, resulting in, among other things,  impaired cognitive abilities. Other toxic metals emitted from power plants,  such as arsenic, chromium, and nickel can cause cancer. EPA estimates  that its finalized regulation would reduce mercury emissions from coal- fueled electricity generating units by 75 percent, as well as reduce SOemissions.retrofit generating units with controls to reduce pollutants and, when it is  not economic to retrofit, may retire some generating units.

In response to these regulations, power companies might  Regarding broader market conditions, important market drivers have  been weighing on the viability of coal-fueled electricity generating units.  Key among these has been the recent decrease in the price of natural  gas, which has made it more attractive for power companies to build new  gas-fueled electricity generating units and to utilize existing units more. In  addition, slow expected growth in demand for electricity in some areas  has decreased the need for new generating units. Power companies may  weigh the costs of any needed investments compared with the benefits of  continuing to generate electricity at a particular unit. When the costs  outweigh the benefits, a power company may decide to retire a unit rather  than continue to operate the unit or install new pollution control  equipment.

The majority of coal produced in the United States is used domestically,  though exports represent a small but recently growing fraction of U.S.  coal production. In 2010, the United States exported 82 million tons of  coal, which accounted for 8 percent of total production. As shown in figure  3, coal exports to European and Asian markets represented 76 percent of  total U.S. coal exports in 2011. In 2011, total coal exports were up 31  percent compared with 2010, reaching 107 million tons, due largely to  rising exports to Europe and Asia. This was the highest level of exports  since 1991. In 2011, 35 percent of U.S. coal exports were of the types of  coal typically used to produce electricity, the remainder were of  metallurgical coals used in industrial processes, such as steelmaking.

To better understand the potential future of the coal and electricity  industries, the federal government, private companies, and others use  models to project future industry conditions, including the future use of  coal. For example, EIA, IEA, and IHS Global Insight produce long-term  projections of electricity generation and generation from coal. Because  the future depends on a multitude of factors that are difficult to predict,  EIA assesses various scenarios with different assumptions about future  conditions to better understand the range of potential future outcomes.  For example, EIA’s primary scenario, called its “reference” scenario, is a  business-as-usual estimate based on existing policies, known technology,  and current technological and demographic trends. Additional scenarios  make different assumptions about fuel prices, economic conditions, and  government policies, among other things. Some of these scenarios are  especially relevant to the question of coal’s future, because they address  factors currently affecting the industry, such as the prices of coal and  natural gas—a fuel that competes with coal—and possible future policies  to address climate change. Appendix II presents further information about  the major assumptions behind these forecasts and scenarios.

section_title: Retirements, Retrofits, and New Construction May Result in a Smaller but Cleaner Coal- Fueled Electricity Generating Fleet
paragraphs: The nation’s fleet of coal-fueled electricity generating units may have less  total generating capacity in the future, and the fleet may be capable of  emitting lower levels of pollutants, according to available information.  These changes will be driven by industry plans to retire a significant  number of units, install pollution control equipment on others, and build a  few, new coal-fueled units that may emit lower levels of pollutants than  the current fleet’s average emissions.
subsections: section_title: Power Companies Are Planning to Retire a Significant Number of Older, Smaller, More Polluting Units
paragraphs: According to forecasts we reviewed, power companies may retire a  significant number of coal-fueled units in the future. In its reference  scenario reflecting current policies, EIA projects that power companies  may retire 49,000 MW of coal-fueled capacity from 2011 through 2035  (i.e., 15 percent of coal-fueled capacity in 2011). IHS Global Insight  projects that power companies may retire 76,476 MW of capacity from  2011 through 2035 (i.e., 24 percent of coal-fueled capacity in 2011).

Our statistical analysis of Ventyx data on announced retirement plans  indicates that, among other things, companies are planning to retire units  that are older, smaller, and more polluting. To assess the types of units  that may be retired, we analyzed data on current power company plans to  retire coal-fueled units. According to Ventyx data, power companies have  already reported plans to retire 174 coal-fueled units with a total 30,447  MW net summer capacity through 2020—which accounted for 10 percent  of coal-fueled capacity in 2011. As we have previously reported, this  would be significantly more retirements than have occurred in the past–– almost twice as much coal-fueled capacity as retired in the 22 years from  1990 through April 2012. Based on our statistical analysis of these  plans, power companies are more likely to plan to retire units that are  older, smaller, and more polluting. (Appendix I provides further  information on our statistical analysis, which included examining several  other characteristics that may affect plans to retire units such as             (1) whether power companies are traditionally regulated or operate in  restructured markets and (2) a unit’s cost of generating electricity relative  to regional prices.)

Older. Power companies’ plans indicate they are more likely to retire  older coal-fueled electricity generating units than newer units. Today’s  fleet of operating coal-fueled units was built from 1943 through 2012,  with the bulk of the capacity built in the 1970s and early 1980s. As  shown in figure 4, units that power companies plan to retire are  generally older, on average 54 years old compared with units with no  retirement plans that average 39 years old. Some stakeholders we  interviewed said that power companies are more likely to retire older  units because these units may be reaching the end of their useful  lives, can be less efficient at converting coal to electricity, and can be  more expensive than newer units to retrofit, maintain, and operate.

Smaller. The smaller a unit is, the more likely a power company is to  be planning to retire it. (See fig. 5.) Size can be important when  assessing the economics of additional investments needed to  continue to operate coal-fueled units, as smaller units can be more  expensive to retrofit, maintain, and operate on a per-MW basis. For  example, some power companies may choose to install flue gas  desulfurization units—known as scrubbers—to control SO and other  air emissions. According to an EPA report, a typical 100 MW coal- fueled unit could incur capital costs 66 to 74 percent higher per MW to  install a scrubber than a 700 MW unit. In addition, smaller  generating units are generally less fuel-efficient than larger units.  Units that are planned for retirement average 175 MW of capacity  compared with units that are not planned for retirement that average  351 MW of capacity. Figure 5 shows the number of coal-fueled units  by capacity in MW.

section_title: Many Units May Be Retrofitted with Pollution Control Equipment
paragraphs: As we reported in July 2012, power companies may retrofit many coal- fueled electricity generating units with new or upgraded pollution control equipment in response to new environmental regulatory requirements.Though the requirements and deadlines these regulations may establish  for generating units are somewhat uncertain at this time, EPA’s analyses  and two other studies we reviewed in our prior report suggest that one- third to three-quarters of all coal-fueled capacity could be retrofitted or  upgraded with some combination of pollution control equipment, including  scrubbers and other technologies to reduce SO, mercury, and other  emissions. Once retrofitted with this pollution control equipment, the coal- fueled fleet would be capable of generating electricity and emitting much  lower levels of pollution. For example, EPA projects that mercury  emissions from coal-fueled electricity generating units will decrease by 75  percent as a result of its new regulatory requirements. Nevertheless, even  the cleanest running coal-fueled unit may still be more polluting than  generating units that use other fuel sources. For example, the 10 least- emitting coal-fueled units emitted over 10 times as much SO per million Btu compared with an  average of 0.0006 for combined cycle units. Electricity generating units  that rely on solar and wind sources produce no such emissions.

section_title: Some New Generating Units May Be Built and Would Be Larger, Cleaner, and More Efficient Than the Fleet Overall
paragraphs: Available information suggests that industry intends to build some new  coal-fueled electricity generating units. According to Ventyx data, power  companies have plans to build 42 new coal-fueled electricity generating  units with 21,634 MW of capacity in various stages of planning or  development (see fig. 7). However, as we have previously reported,  developers generally have more planned projects than they complete.

The total capacity of coal-fueled electricity generating units in the United  States may decline in the future as less capacity is expected to be built  than is expected to retire. As discussed, 49,000 to 76,476 MW of coal- fueled capacity is projected to retire by 2035 according to EIA and IHS  Global Insight, respectively, and they project that 11,000 MW and 22,134  MW of new coal-fueled capacity will be added by 2035, respectively. EIA  officials told us that new coal-fueled capacity in their projections is  primarily expected in the next few years and represents units that are  already planned or under construction. As less capacity is expected to be  built than is expected to retire, total coal-fueled capacity is expected to  decline in the future, as shown in figure 8. Coal's share of total electricity  generating capacity was about 30 percent in 2011. In EIA’s reference  scenario, coal's share of capacity declines to 25 percent in 2035 as  retiring coal-fueled units are not fully replaced, and as 176,100 MW of  other generating capacity is added in the future.

Any coal-fueled units that are built in the future are likely to be larger, less  polluting, and more fuel-efficient than the average of the coal-fueled fleet  overall. Units that power companies are currently planning to build  average 515 MW of net summer capacity, and the operating fleet  averages 319 MW. Additionally, new units must install technologies to  control emissions, and so are likely to emit lower levels of pollutants and  thus be cleaner than the fleet overall. For example, generating units built  after August 7, 1977, have had to obtain preconstruction permits that  establish air emissions limits and require the use of certain emissions  control technologies such as scrubbers to reduce emissions of SO.addition, some stakeholders we interviewed said that new coal-fueled  units were likely to incorporate designs that are able to convert fuel to  electricity more efficiently.

section_title: Coal Likely to Remain a Key Fuel Source, but Future Use May Be Affected by Fuel Prices, Environmental Regulations, and Other Factors
paragraphs: Coal is likely to continue to be a key fuel source for electricity generation  in the United States, but its share as a source of electricity is expected to  decline, and the future use of coal to generate electricity in the United  States may be affected by several key factors that include the price of  natural gas and other competing fuels, environmental regulations, and the  demand for electricity, among others. In addition, several stakeholders we  interviewed said that coal may increasingly be exported for use in other  nations, though the extent of future exports is uncertain.
subsections: section_title: Coal Likely to Continue to Be a Key Source of Electricity in the Future, though Its Share Is Generally Expected to Decline in the United States
paragraphs: According to stakeholders we interviewed and projections by EIA, IEA,  and IHS Global Insight, coal is likely to continue to be a key fuel source  for U.S. electricity generation, but its share as a source of electricity is  generally expected to decline in the future. Some stakeholders told us  that, in the future, electricity generation from coal is likely to be displaced  by generation from other fuel sources, particularly natural gas, but they  still expect coal’s contribution to electricity generation to be significant.  Furthermore, in its reference scenario, EIA estimates that coal will  represent 38 percent of U.S. electricity generation in 2035 under current  policies––down from 42 percent in 2011.amount of electricity generated using coal is expected to remain relatively  constant over this same period under EIA’s reference scenario, growing  by 0.1 percent annually. However, the amount of electricity generated  using some other fuel sources, for example, natural gas and renewables,  will increase at higher annual rates—1.4 percent and 2.3 percent  respectively—diminishing coal’s total share of electricity generation.

section_title: Agency Comments and Our Evaluation
paragraphs: We met with EIA officials to discuss an early draft of this report and  incorporated technical suggestions where appropriate. We also provided  a draft of this report to EIA and EPA for formal comment. EIA and EPA  did not provide written comments for inclusion in this report. EPA's Office  of Air and Radiation did provide technical comments and stated that the  report contained a very good description of many of the changes going on  in coal and electricity markets that are affecting the use of coal to  generate electricity. In its technical comments, EPA suggested that the  draft’s emphasis on environmental regulations, particularly on the  Highlights page, was misleading and not consistent with the rest of the  report, which has a fuller discussion of many factors affecting the future  use of coal. EPA stated that market changes, which we discuss in the  report, would have significant impacts even in the absence of EPA's  regulations. We do not agree that the report was misleading, but given  that the Highlights page may be read without the benefit of the fuller  discussion found in the report, we moved language from the body of the  report to the Highlights page about other factors affecting the use of coal.  EPA provided other technical comments, which we incorporated where  appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Administrators of the EIA and EPA, and  other interested parties. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.

section_title: Appendix I: Analysis of Characteristics of Coal-Fueled Generating Units That Power Companies Plan to Retire
paragraphs: This appendix describes our statistical analysis of characteristics of coal- fueled electricity generating units, such as age and size, that are likely to  affect power companies’ plans to retire certain units. We use this analysis  to estimate the number and generating capacity of other coal-fueled units  that power companies are likely to consider retiring.
subsections: section_title: Methodology
paragraphs: To test the hypothesis that power companies are likely to retire older,  smaller, and more polluting coal units by 2020, we used logistic  regression analysis. We analyzed industry data on all coal-fueled units  owned by power companies that have already announced plans to retire  one or more of these units. Using unit- and company-level data, primarily  from company-reported databases, we developed a model depicting the  relationship between companies’ announced plans to retire a unit and that  unit’s characteristics—age, size, emissions rates of sulfur dioxide (SO)  and nitrogen oxides (NO), and the regulatory status of the power  company that owns the unit, specifically whether the company is  traditionally regulated or operates in a restructured market. To estimate  the number and generating capacity of additional units likely to be retired,  we applied our model to a dataset consisting of coal-fueled units owned  by power companies that have not announced any retirements.
subsections: section_title: Model of Plans to Retire Coal-Fueled Generating Units
paragraphs: In developing our model of power companies’ plans to retire coal-fueled  units, we relied on economic theory, as well as discussions with  stakeholders and our review of studies. Stakeholders included  representatives from power companies, a coal company, industry  associations, and nongovernmental organizations, and officials from  federal and state agencies. Stakeholders and studies mentioned the  following characteristics as likely unit-level determinants of power  companies’ plans to retire a coal-fueled unit or keep it in operation: age; generating capacity; fuel efficiency (i.e., how efficiently a unit converts fuel to electricity) operating cost and profitability; pollution emission rates and whether a unit already has various types  of emissions control equipment; and  regulatory status.

As a general matter, the larger, newer, more efficient, and less polluting a  generating unit is, the more likely it is that a power company may to want  to keep it in service and invest in retrofits that may be needed for it to  comply with environmental laws or regulations. For example, if a large,  new generating unit that a power company uses to meet a significant  portion of customer demand is not in compliance with environmental  regulations, retiring it would likely require replacing it with another unit of  similar size. Doing so may be very costly, and retrofitting it with the  requisite pollution control equipment may be a more economical choice.

It is also reasonable to expect regulatory status to have some impact on  power companies’ retirement plans because such plans could involve  significant investments. For companies that are traditionally regulated,  state public utility commissions review power companies’ plans for major  investments in pollution control equipment in the case of a retrofit, or in  replacement power generation capacity if it is needed after a unit is  retired. Decisions by power companies in restructured markets are not  subject to the same state public utility oversight. Furthermore, once state  public utility commissions approve a traditionally regulated company’s  plan to invest in major retrofits or replacement units, they allow it to  charge rates to recover its investment costs. Companies operating in  restructured markets have no such cost-recovery provisions, so their  investments in retrofits or replacement units may be riskier.

Our model does not include all the characteristics that stakeholders and  studies identified as possible characteristics that power companies  consider in deciding which coal-fueled units to retire. First, economic  theory and our analysis of data on coal-fueled units indicate that there are  interrelationships among some of these characteristics; for example,  newer, larger electric generating units tend to be more fuel efficient, and  this fuel efficiency contributes to lower operating costs. Hence, including  all characteristics would be redundant and weaken the statistical results.  Below, we discuss some specifications of the model with alternative sets  of variables. Second, there are likely other characteristics that may  influence power companies’ plans to retire generating units that we were  unable to include in our statistical analysis. We discuss limitations of our  model below.

section_title: Data Used
paragraphs: We used U.S. electricity data at the level of individual coal-fueled  generating units that we obtained under contract from Ventyx, a  company that maintains a proprietary database containing consolidated  energy and emissions data from the Energy Information Administration  (EIA),size, measured in megawatts (MW) of generating capacity;  fuel efficiency;  , and carbon dioxide;  types of installed control equipment or whether owners plan to install  control equipment in the future;  various cost measures, including generating unit marginal cost; and  regulatory status: equals 1 if the power company that owns the unit  was traditionally regulated or 0 if the company was operating in a  restructured market.

We also used regional day-ahead market prices from the  IntercontinentalExchange (ICE) company, and spot market prices from  the Federal Energy Regulatory Commission (FERC) to calculate an  average wholesale market price for the regional markets associated with  each unit in our dataset. For each market region, we calculated a simple  average of daily prices for the year 2011 from daily ICE price data. For  some of the regions, however, there were no price data available from  ICE, so we used the 2011 average spot market price from FERC.

While our model does not include all the aforementioned characteristics,  we used most of these characteristics in alternative specifications of the  model and discuss two of these specifications below.

Our complete dataset includes 959 coal-fueled units. This dataset  includes only units that have a net summer generating capacity greater  than 25 MW, making them subject to EPA emissions monitoring and  reporting requirements. We excluded units that have not reported any  electricity generation or SO or NO emissions over the past 5 years.the total 959 units, 482 units belong to power companies that have  announced plans for retiring at least one coal-fueled unit.

section_title: Results
paragraphs: We used logistic regression (logit) analysis to analyze the characteristics  that are affecting power companies’ retirement plans of coal-fueled  electricity generation units. Regression analysis in general estimates the  effect of a change in an independent variable on the outcome  (dependent) variable, while holding other variables constant. Logit is a  type of regression analysis for situations in which the dependent variable  is a categorical variable—one that can take on a limited number of  values—instead of a continuous, quantitative variable. In this case, the  categorical variable is binary, which means that the choice is between  only two outcomes.

We estimated the logit regression equation for the subgroup of 482 coal- fueled generating units belonging to power companies that have  announced plans to retire at least one coal-fueled unit. The dependent  variable in our model is whether to retire or not retire a coal unit, and the  independent variables are the (1) age of unit; (2) net summer capacity as  a measure of unit size; (3) unit’s SO  emissions per unit of heat input from the fuel used in the unit’s electricity  generation, measured using millions of British thermal units (Btu); (4)  unit’s NO emissions rate in lb/million Btu; (5) whether the power  company that owns the unit is traditionally regulated or operates in a  restructured market.

Table 2 shows our resulting estimated equation and relevant statistics.

These results generally confirm that smaller, older and more polluting  units are more likely candidates for retirement. In the table above, the  second column gives the estimated value of the coefficient, which  describes the relationship between the independent variables and the  likelihood of retirement. The remaining columns give the standard error  and the significance level. For example, the coefficient on net summer  capacity is negative, which means that an increase in capacity decreases  the probability that a unit is planned for retirement. Furthermore, as  shown in table 2, the estimated coefficient is significant at the 6 percent  level. An estimated coefficient is typically considered statistically  significant if the significance is less than 10 percent and very significant if  it is less than 5 percent. Similarly, the coefficient on unit age is positive,  which means that an older unit is more likely to be retired, and this  coefficient estimate is significant at the 1 percent level. The coefficients  on SO and NO emissions are also positive and significant at the 1  percent level.

Using the resulting logit regression equation, we analyzed “marginal  effects” of changes in each of the independent variables on plans to retire  an “average” unit owned by a power company in (1) a traditionally  regulated market and (2) a restructured market, and the “average unit,”  for this purpose, is one with median values for age, size/net summer  capacity, SO emissions rates, as shown in tables 3 and 4.

For example, a 10 percent increase in the capacity of an average unit  owned by a power company in a restructured market, from 193 to 212  MW, would decrease the probability of that unit’s retirement by about 2  percent, all other variables being held constant. For a unit owned by a  power company in a traditionally regulated market, the same 10 percent  would decrease the probability of retirement by about 1 percent. Note that  the median values for units owned by power companies operating in  traditionally regulated and restructured markets are not the same and that  a 10 percent increase is therefore different.

section_title: Analysis Indicates Units Power Companies Likely to Consider Retiring
paragraphs: The next step in our analysis was to use the resulting logit regression  equation to estimate the number and generating capacity of other coal- fueled units that companies are likely to consider retiring among units  belonging to companies that have not, as of yet, announced plans to  retire coal-fueled units. We also estimated the generation associated with  these potential retirements in megawatt-hours (MWh). We assume that  some or all of these companies are likely to retire coal-fueled units, but  that they either have not decided which ones, or simply have not publicly  announced their plans. We further assume that these companies have or  will base their decisions on the same characteristics as the companies  that have already made announcements. Table 5 shows our analysis of  units that power companies may consider for retirement by 2020.

As shown in table 5, for the group of coal-fueled units whose owners have  not reported any coal-fueled unit retirements, our analysis indicates from  90 to 138 units may likely be considered for retirement by 2020. This  range represents the 95 percent confidence interval around our point  estimate of 114 units. In other words, our model indicates that there is a  95 percent probability that the actual number of units that will retire is  within this range. These 90 to 138 units account for 15,700 to 25,200 MW  of capacity and 91 to 151 million MWh of electricity generation. If we add  these units to those that power companies have announced for  retirement, the total of coal-fueled retirements could range from 264 to  312 units by 2020, amounting to from 46,100 to 55,600 MW of capacity  and average annual generation of 241 to 301 million MWh.percentage terms, this would be 15 to 18 percent of the capacity and 13  to 16 percent of the generation of the current coal-fueled fleet of  generating units.

section_title: Limitations and Alternative Model Specifications
paragraphs: This section discusses the limitations of our model and alternative model  specifications that we tested.
subsections: section_title: Limitations
paragraphs: A major limitation of our model is that we used a nonrandom sample of  the entire population of coal-fueled units to estimate the relationship  between the characteristics of coal-fueled units and power companies’  plans to retire a unit. Our sample consisted of companies that announced  plans to retire at least one unit but was not a random sample. It is  possible that the companies that announced planned retirements and  those that did not so announce differ in systematic ways that we do not  observe from the data.bias.

Such differences could result in omitted variable  Another important limitation of our model is that we did not include all  factors that contribute to power companies’ decision to retire coal-fueled  units. Apart from unit-level considerations, major factors that affect a  power company’s decision to retire a coal-fueled unit include fuel costs,  environmental regulations, regional and local market considerations   (e.g., expected future electricity demand  and supply conditions, and  transmission constraints), and technological developments in electricity  generation and pollution control. For example, we did not take into  account that planned unit retirements might make otherwise marginal  units in some regions more valuable and less likely to retire. Companies  that own coal-fueled units may have different expectations regarding  these factors, which we did not consider in our analysis. Effectively,  therefore, we assumed that power companies have very similar  expectations regarding these factors.

These above limitations could mean that our model does not accurately  or fully reflect power companies’ unit retirement decisions. This would  also mean that our estimates of how many unannounced units will retire  may be inaccurate. For most of the limitations, the direction of bias in our  model—the extent to which it may over- or under-estimate the likelihood  of a unit retiring—is unclear. Addressing these limitations was beyond the  scope of our review.

section_title: Alternative Specifications
paragraphs: To check the robustness of our model, we tested different specifications;  that is, we ran logistic regressions using different sets of independent  variables. For example, we tried specifications that included a measure of  a unit’s fuel efficiency, and another representing whether a unit is  planning to install pollution control equipment. We also tried a version  with unit average capacity factors in recent years, a measure of how  intensively a unit is utilized. Based on our results, none of these variables  significantly improved the model. Below, we discuss two other alternative  specifications in more detail.

In one alternative specification, we used clustered standard errors. Our  model assumes that each individual coal-fueled unit has a unique error  term that is independent of every other unit. In this specification, we allow  for the possibility that units owned by the same power companies may be  related in unobserved ways and, therefore, the error terms may be  correlated. As shown in table 6, the estimated coefficients in this  alternative specification are very similar to our model, but the standard  errors are generally bigger, and the estimated coefficients are generally  less statistically significant. This is especially true for net summer  capacity, which is no longer statistically significant at the commonly  accepted 10 percent level.

In a second alternative specification, we used adjusted marginal cost as a  proxy for the profitability of a unit. Based on economic logic and what we  heard from stakeholders, we expected some indicator of the cost and  profitability of electricity generation to contribute significantly to the  retirement decision. Table 7 shows a version with marginal cost adjusted  for regional wholesale prices and an interaction term with marginal cost  and regulatory status. We adjusted marginal cost by dividing it by the  regional wholesale price to account for the fact that units are more or less  valuable depending on regional wholesale electricity prices. The  interaction term allows us to effectively estimate two coefficients for  adjusted marginal cost, one for power companies in traditionally regulated  markets, and one for power companies in restructured markets. We  included an interaction term to account for the possibility that power  companies in traditionally regulated and restructured markets view costs   Indeed, as shown in table 7, the estimated adjusted marginal  differently.cost coefficients differ—for power companies in restructured markets, the  adjusted marginal cost coefficient is about 5.8, while the estimated  coefficient for power companies in traditionally regulated markets is the  adjusted marginal cost coefficient plus the interaction term (or 5.8 plus - 8.2 = -2.4). These results suggest that while higher adjusted marginal  costs increase the probability of retirement of units owned by power  companies in restructured markets, they decrease the probability for units  owned by traditionally regulated power companies. The interpretation of  these results is unclear.

Regarding the costs of producing electricity, our findings differed for  companies in restructured markets and companies that are traditionally  regulated. Specifically, our results suggest that companies in restructured  markets are more likely to retire units with higher adjusted marginal costs.  In contrast, our results suggest that companies operating in regulated  markets are less likely to retire units with higher adjusted marginal costs.  A number of characteristics, not considered in our model, could provide  alternative explanations for this difference. For example, it could be the  case that the units in our sample have unique characteristics. One such  potential case could be that units owned by power companies in  traditionally regulated markets may be located in areas where concerns  about the reliability of the electricity system are significant, and the costs  of retrofitting an older generating unit are less costly than retiring it.  Similarly, it could be that our sample contains a number of units located in  areas with lower cost alternative suppliers or where prices are low— diminishing the attractiveness of even a relatively low-cost unit.

section_title: Appendix II: Description of Selected Scenarios and Forecasts
paragraphs: Table 8 describes key scenarios and assumptions in the EIA, IEA, and  IHS Global Insight forecasts discussed in this report.

section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jon Ludwigson (Assistant  Director), Mike Armes, Patrick Dudley, Philip Farah, Quindi Franco, Cindy  Gilbert, Paige Gilbreath, Alison O’Neill, Kendal Robinson, Jeanette  Soares, and Kiki Theodoropolous made key contributions to this report.

section_title: Related GAO Products
paragraphs: EPA Regulations and Electricity: Better Monitoring by Agencies Could  Strengthen Efforts to Address Potential Challenges. GAO-12-635.  Washington, D.C.: July 17, 2012.

Air Emissions and Electricity Generation at U.S. Power Plants.  GAO-12-545R. Washington, D.C.: April 18, 2012.

Coal Power Plants: Opportunities Exist for DOE to Provide Better  Information on the Maturity of Key Technologies to Reduce Carbon  Dioxide Emissions. GAO-10-675. Washington, D.C.: June 16, 2010.

Clean Coal: DOE’s Decision to Restructure FutureGen Should Be Based  on a Comprehensive Analysis of Costs, Benefits, and Risks.  GAO-09-248. Washington, D.C.: February 13, 2009.

Climate Change: Federal Actions Will Greatly Affect the Viability of  Carbon Capture and Storage As a Key Mitigation Option. GAO-08-1080.  Washington, D.C.: September 30, 2008.

Restructured Electricity Markets: Three States’ Experiences in Adding  Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002.


Question-summary annotations: questions: question: What changes to the electricity generating fleet can be made to improve its generating capacity and decrease pollution?
answer: Retirements of older units, retrofits of existing units with pollution controls, and the construction of some new coal-fueled units are expected to significantly change the coal-fueled electricity generating fleet, making it capable of emitting lower levels of pollutants than the current fleet but reducing its future electricity generating capacity.
child_questions: question: What influenced these changes?
answer: Two broad trends are affecting power companies' decisions related to coal-fueled generating units--recent environmental regulations and changing market conditions, such as the recent decrease in the price of natural gas.

question: What did GAO's analysis of retirement trends reveal?
answer: Regarding retirements, forecasts GAO reviewed based on current policies project that power companies may retire 15 to 24 percent of coal-fueled generating capacity by 2035--an amount consistent with GAO's analysis. GAO's statistical analysis, examining data on power companies that have announced plans to retire coal-fueled units, found that these power companies are more likely to retire units that are older, smaller, and more polluting. For example, the units companies plan to retire emitted an average of twice as much sulfur dioxide per unit of fuel used in 2011 as units that companies do not plan to retire. Based on the characteristics of the units companies plan to retire, GAO estimated additional capacity that may retire. In total, GAO identified 15 to 18 percent of coal-fueled capacity that power companies either plan to retire or that GAO estimated may retire--an amount consistent with the forecasts GAO reviewed.

question: What did GAO's analysis of retrofit trends indicate?
answer: Regarding retrofits, the coal-fueled generating fleet may also become less polluting in the future as power companies install controls on many remaining units.

question: How will new coal-fueled units be superior to older units?
answer: Regarding new coal-fueled units, these are likely to be less polluting as they must incorporate advanced technologies to reduce emissions of regulated pollutants. Coal-fueled capacity may decline in the future as less capacity is expected to be built than is expected to retire.

questions: question: Why is coal important to the US economy?
answer: Coal is a key domestic fuel source and an important contributor to the U.S. economy.
child_questions: question: What is the main purpose of coal for the US economy?
answer: Most coal produced in the United States is used to generate electricity. In 2011, 1,387 coal-fueled electricity generating units produced about 42 percent of the nation's electricity.

question: Why has the consumption of coal fallen in recent years?
answer: After decades of growth, U.S. coal production and consumption have fallen, primarily due to declines in the use of coal to generate electricity.

questions: question: Why is the use of coal to generate electricity a harmful practice?
answer: According to the Environmental Protection Agency (EPA), using coal to generate electricity is associated with health and environmental concerns such as emissions of sulfur dioxide, a pollutant linked to respiratory illnesses, and carbon dioxide, a greenhouse gas linked to climate change.
child_questions: question: What changes might power companies make to help mitigate these concerns?
answer: In response to recent environmental regulations and changing market conditions, such as the recent decrease in the price of natural gas, power companies may retire some units, which could affect the coal fleet's generating capacity--the ability to generate electricity--and the amount of electricity generated from coal. Power companies may also retrofit some units by installing controls to reduce pollutants.

questions: question: What was GAO asked to examine?
answer: GAO was asked to examine (1) how the fleet of coal-fueled electricity generating units may change in the future in terms of its generating capacity and other aspects and (2) the future use of coal to generate electricity in the United States and key factors that could affect it.
child_questions: question: What data did GAO collect for this report?
answer: GAO conducted a statistical analysis of plans for retiring coal-fueled units, interviewed stakeholders, and reviewed information on industry plans and long-term forecasts by EIA and others.

question: What recommendations will GAO make in this report?
answer: GAO is not making any recommendations in this report.