The Coal Plant an Illinois Town Couldn't Give Away

Photographer: Daniel Acker/Bloomberg
The Dynegy Inc. E.D. Edwards Power Station stands on the banks of the Illinois River in Bartonville, Illinois, on Feb. 19, 2014.

How much is an old coal power plant worth? With natural gas production booming and environmental rules looming, in Illinois the answer is clear: It can be hard to even give one away.

For evidence, look to the E.D. Edwards power plant, built in 1960 close to the coal mines south of Peoria. While it pumped out electricity for once-booming steel mills and distilleries, the plant cruised along and avoided spending the millions of dollars to install a scrubber on its smokestack.

And so Edwards, confronting a need to meet state and federal rules to clean up and mounting competition from cheaper natural gas, was part of an unusual transaction last year. Owner Ameren Corp. paid Dynegy Inc. to take Edwards and four other Illinois coal plants off its hands, a transaction that perplexed some analysts.

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“This was an exercise in kicking the can down the road,” said David Johnson, an analyst at ACM Partners, a financial advisory firm that reviewed the sale for environmentalists trying to scuttle it. “To throw money at someone to take something off your hands is a bit atypical.”

Ameren’s move is among a series of closures, bankruptcies or fire sales by companies desperate to get out of investments in aging U.S. coal plants. Owners are reacting to abundant electricity from natural gas and wind, flat or declining demand and a slew of new environmental rules meant to clean up the country’s top source of pollution. Also in the mix: efforts by environmentalists targeting individual coal facilities.

Smokestack Worries

For workers at the Edwards plant and nearby residents, closure is a threat they live with every day. The plant’s 503-foot high smokestack towers over the industrial community of Pekin, near fencing and ethanol plants. Train tracks bring in the coal from Wyoming, and from a perch nearby bulldozers can be seen working on mounds taller than a home, pushing the fuel onto belts that carry it into the steam furnace.

Local workers say they wonder if Dynegy plans to invest in keeping the plant running. Neighbors worry about pollution from the smokestack today, and what will happen to the site and the toxic waste or sludge abandoned near the Illinois River if it’s shuttered.

Dynegy already announced plans to shut one of the units.

“My biggest fear is that they just desert it,” said Robin Garlish, a local activist worried about air pollution. “It’s very scary because the clock is just ticking on it right now.”

Declining Share

That same clock is reverberating for the U.S. coal industry more broadly.

Coal accounted for 39 percent of total U.S. electricity generation last year, down from about 50 percent from 2003-2008 and a rebound from a record low 37 percent in 2012. (Coal use is forecast to regain some of its luster and provide more than 40 percent of the nation’s electricity in the next three years.)

In 2011 and 2012, 14 gigawatts of coal-fired generation was shut, and another 63 gigawatts may disappear by 2017 under existing regulations, according to an analysis by Meredith Annex of Bloomberg New Energy Finance.

Electric utilities have announced the closure of more than 150 coal boilers; another 263 units could follow. Combined, the units account for a quarter of the nation’s coal-fired capacity, Annex said. With rules in development to govern everything from coal ash to water effluent, even more plants could be forced out of business, too.

‘Printing Money’

By 2030, less than a third of U.S. power will come from burning coal, as natural gas supplants it as the top source for electricity generation, according to a research report by ICF International.

Owners of coal plants “were printing money during the mid-2000s, but it’s a very different future,” Sue Tierney, managing principal of the Analysis Group in Boston, said in an interview. “Demand is flat, natural gas is much more flexible, and coal is taking the squeeze.”

To be sure, that overall trend is not consistent. The run- up in electricity prices during a prolonged cold snap this year has pushed coal plants to run at their peak, as supplies of natural gas were constrained and prices soared. Industry lobbyists say this shows coal is a crucial part of keeping electricity cheap and reliable.

“The alarms sounding from this winter’s arctic weather conditions may foreshadow what lies ahead as looming regulatory deadlines threaten a growing portion of the coal-based power plant fleet,” Hal Quinn, the president of the National Mining Association, which represents coal producers such as Peabody Energy Corp. and Alpha Natural Resources Inc., wrote Feb. 18.

Customers’ Costs

More generally, low gas and electricity prices mean coal-plant owners have been unable to get the same pricing premium. And, utility oversight boards are questioning whether it makes sense for customers to finance the hundreds of millions of dollars to clean up aging plants.

Construction of coal plants has stalled, and most of today’s existing plants were built before 1980. Now, after years of delay, rules are about to kick in requiring all plants to cut mercury emissions in their smokestacks. That means plant owners who avoided installing equipment for years in the absence of universal mandates must now decide to invest, sell or close.

Still to come: the first-ever rules for greenhouse-gas emissions that the Environmental Protection Agency are scheduled to be issued in June.

Capturing Carbon

Coal when burned to produce power generates twice the carbon dioxide as natural gas for each unit of electricity, and so the rules on climate change create hurdles for the fuel that’s predominated since the Industrial Revolution. Already, an EPA proposal would outlaw the construction of coal plants that lack expensive carbon-capture technology.

“It was clear that there were a number of coal facilities that were hanging on, uncontrolled” for pollution, EPA chief Gina McCarthy said on Dec. 2 in Washington. The EPA rules “provided a decision point that will provide much more reductions than we were requiring.”

Howard Learner, the head of the Chicago-based Environmental Law and Policy Center, offers a contrast more common among used-car dealers: “Most of the owners of these power plants were running them like old Chevy beaters.”

And while rules and local opposition to coal pile up, the industry confronts a boom from cleaner competitors. Natural gas prices, buoyed by accelerating production from hydraulic fracturing, fell to decade lows in 2012. Even with a weather-related jump this year, the cost of gas is less than half the $13.57 per million British thermal units reached before the global financial markets slumped in late 2008.

Gas, Coal

Taking into account the cost of construction, fuel and running the equipment, a modern natural gas plant is cheaper than a coal plant, and in some places onshore wind can be cheaper than coal, too, according to Bloomberg New Energy Finance.

The signs of change are already evident among companies that are coal’s chief customers. Southern Co., which runs one of the nation’s biggest fossil-fueled plants, said coal produces 35 percent of its power, half the total historically. By 2020, Southern expects 35 percent to 55 percent of its power will come from natural gas, likely exceeding coal’s share.

American Electric Power Co., which buys 55 million tons of coal a year, sees the fuel accounting for less than 50 percent of its capacity in 2016, down from 65 percent in recent years. The company abandoned plans for a $940 million upgrade at its Big Sandy plant in Kentucky, where coal is a powerful economic and political force, and will instead convert one unit to natural gas.

Cutting Coal

The Tennessee Valley Authority said on Nov. 14 that it would shutter eight coal-burning units, and move to pare its use of coal to 20 percent of total generation from 52 percent in 2011. “Our generating fleet has to look different than it has in the past,” Bill Johnson, TVA’s chief executive officer, said at a board meeting to decide the change.

The situation in Illinois is especially acute, with each of the state’s top three coal-power suppliers struggling through financial pressures or creditor protection in recent years. Ameren decided to exit the power generation business in the state, and said a year ago it wanted to find a buyer for its five Illinois coal plants.

Houston-based Dynegy set up a subsidiary, separate from its main business to run the 4,119 megawatts of generation and Ameren’s related businesses. In exchange for taking the plants and $825 million in debt, Ameren agreed to pay more than $200 million for a number of items and to provide two years of collateral support.

Dynegy’s Bet

While Ameren got out of the business, Dynegy said it was taking a bet that as other coal plants closed, prices for both electricity and natural gas would rise -- and with it, profits.

“This transaction, requiring minimal to no capital from Dynegy, dramatically magnifies our upside leverage,” Bob Flexon, Dynegy’s chief executive, said on a call with investors last March, when the sale was first announced. last March, when the sale was first announced. The company set-up an independent unit to run the plants, because, “Dynegy cannot and will not put its balance sheet at risk.”

Without limited cash at risk, workers are left wondering whether Edwards and other plants can survive.

“It’s a very old system, and it needs upgrading,” said Anthony Roberston, who has been working as a driver in the plant for nine years. “We are very uncertain about what our future will hold.”

Market Conditions

Dynegy said it’s committed to the plants, and the synergies of its joined fleet of 10 plants in Illinois can help them thrive, especially with the recent run-up in electricity prices.

“This allows us to operate the plants in a more economic manner which preserves the competitiveness,” Katy Sullivan, a Dynegy spokeswoman, said in an e-mail. “Dynegy continues to forecast an improving market over the next few years. The synergies and liquidity build a bridge for these facilities to operate while the market recovers.”

For Johnson, the analyst for the Sierra Club and other environmental groups opposing the sale, Dynegy’s assumption of the upside benefits without the downside risks is a sign that even it doesn’t believe in the sale.

The independent unit created by Dynegy is “likely to fail absent an unexpected change in market conditions,” Johnson wrote in a report submitted to the Illinois Pollution Control Board in opposing the transaction. The company is taking a “highly leveraged ‘gamble’ on the future of energy prices.”

Local Pressures

One wild card is pressure from local activists such as Garlish and groups such as the Sierra Club, which are doing all they can to shut plants like Edwards. Michael Bloomberg, the founder of Bloomberg LP, pledged $50 million over four years to the Sierra Club’s Beyond Coal campaign in 2011.

Without any specialized equipment to scrub it, the Edwards plant belched 11,803 tons of sulfur dioxide in 2012, making it a major source of such pollution in the state. Last July, Pekin was designated one of the two areas in Illinois that had high concentrations of the pollutant, which can worsen asthma or respiratory disease. The state must now come up with a plan to clean up that pollution, with the plant one of two large emitters nearby.

And air quality isn’t the only worry. An 89-acre pond of contaminated water sits across a levee not far from the Illinois River, and a state-issued water permit sets no limits on the mercury, cadmium and other minerals that can be discharged into the river, according to a report issued by the Waterkeeper Alliance and Environmental Integrity Project.

Coal Ash

Both the state and federal governments are writing new rules to govern those toxic coal-ash ponds.

As a condition for buying the plants, Dynegy appealed to the Illinois Pollution Control Board for a delay in a requirement to install a scrubber to largely eliminate sulfur-dioxide emissions on a separate plant in Newtown. The Sierra Club mobilized to fight the request, and even after the board approved the extension, it hasn’t surrendered. It filed an appeal to the courts to try to overturn the board’s action.

“They are allowing air quality to be a chip on the table” to help clear the way for a sale, said Emily Rosenwasser, a spokeswoman for the San Francisco-based Sierra Club. The structure of the sale “speaks a lot about the value of Illinois coal plants in this day and age.”

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