Renewable tax credits and changes on the grid are making most coal-fired plants uneconomical

Renewable tax credits and changes on the grid are making most coal-fired plants uneconomical

Energize Weekly, February 8, 2023

A combination of new federal incentives for renewable generation and a shift in the way electric grids are managed has led to a point where it is more expensive to operate almost all the coal-fired power plants in the U.S. than replace them with wind and solar installations.

All but one of the country’s 210 coal-fired plants are more expensive to operate going forward than swapping them for wind and solar, according to an analysis by the climate-change think tank Energy Innovation Policy and Technology.

The Dry Fork Station, near Gillette, Wyo., the study found, is the plant it will cost less to continue running than replace with renewable power.

“For more than three quarters of U.S. coal capacity, the all-in cost per MWh (megawatt-hour) of the cheapest renewable option is at least a third cheaper than the going-forward costs for the coal it would replace,” the analysis said.

The study compared the marginal cost of running each coal plant with the levelized cost – the cost of building and operating an installation for over its lifetime – of new wind and solar.

Energy Innovation has been tracking the costs of coal-fired and renewable generation for years, and as recent as 2017, its “crossover” report found 62 percent of coal-fired plants were uneconomical.

Federal policy and coal-fired plants’ role on the grid have accelerated the trend, according to the think tank’s current analysis.

One major change was the new federal subsidies and credits for wind and solar generation and for the replacement of coal-fired units in the Inflation Reduction Act (IRA) signed into law by President Joe Biden in August 2022.

The act, which “extended and expanded clean energy tax credits, along with new funding to guarantee loans for refinancing fossil assets and reinvesting in clean energy infrastructure, has shifted the economic scale even further toward wind and solar,” the analysis said.

The main subsidy for wind is the Production Tax Credit (PTC), providing a credit of about $26 for each MWh generated by a new wind farm during its first 10 years of operation. The prime solar subsidy is the Investment Tax Credit (ITC) equal to 30 percent of the total system costs.

“Prior to the IRA’s passage, the PTC had expired, and the ITC had begun phasing out with a value of 26 percent for projects starting construction in 2022,” the report said. “The IRA created long-term certainty for these tax credits.”

The credits will be in place through 2032 or until electricity sector greenhouse gas emissions fall 75 percent below 2022 levels, whichever is later.

The law also creates an incentive – a 10 percent tax credit boost – for new renewable generation built in areas with existing coal-fired plants or retired coal plants.

A project can earn an additional 10 percent increase in the tax credit for meeting domestic content requirement.

The IRA also appropriated $5 billion to the U.S. Department of Energy to support $250 billion in loan-making authority to facilitate refinancing and reinvestment in capital projects at fossil infrastructure sites, using below-market interest rates.

The act also authorized another $9.7 billion for rural electric cooperatives through the U.S. Department of Agriculture.

“New federal tax credits in the IRA make the economic case for replacing coal with clean energy unequivocal,” the report said.

The changing role of coal-fired generation on the grid is also making these plants less economical.

“Coal-fired power was the bedrock of a reliable, affordable U.S. power sector for nearly a century,” the report said. Since 2010, however, coal generation has declined 52 percent, and renewable power generation surpassed coal generation for the first time in 2020.

In 2011, the U.S. had nearly 318 gigawatts (GW) of coal-fired capacity. That number was down to 221 GW in 2021, with almost a quarter of the remaining fleet slated for retirement by 2029.

Coal-fired plants have moved from being baseload to backup, ramping up and down to supplement renewable generation. The coal-fired plants survey by Energy Innovation were running about 46 percent of the time.

“This on-again, off-again operation increases wear and tear on coal plants designed for a different operating paradigm,” the study said.

Displacement by cheaper gas – which ramps up and down more easily – and renewables means baseload operation is increasingly unprofitable for existing coal plants.

There remain both financial and operational challenges in replacing coal-fired plants with wind and solar installations.

Coal-fired plant owners, primarily investor-owned utilities operating as regulated monopolies, have at least $176 billion in unamortized investment in coal-fired power plants. These costs are covered over the long term through electricity rates.

“Without a change to this structure, monopoly utilities have little to gain from early coal plant retirement and they may perceive retirement or partial replacement as putting cost recovery at risk,” the report said.

A straight substitute of new renewable generation for coal-fired generation also may not always be possible.

“The reality is that coal retirement is a complex process that depends on the reliability needs of the local and regional electricity grid, which in turn, depends on the entire resource portfolio’s dynamics,” the report said. “For example, in some regions one-to-one replacement with a combination of wind and solar resources may not adversely affect reliability. In others it may, depending on what other resources are serving the power grid.”

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