Report: Coal plant retirements will change future power prices

Energy prices could rise to about $3-$4 per MW during peak-use hours because of the power generation capacity losses from shutting down coal-fired plants, according to a study by The Brattle Group. Off-peak costs could hit $1-$2 per MW.

However, if a spike in natural gas prices were to accompany coal plant retirements, the total impact on energy prices could be as high as $11 per MW during peak hours or $6 per MW during off-peak hours.

Although many studies have projected the amount of likely coal plant retirements and retrofits due to recent environmental regulations, the implications of such supply shifts on wholesale energy and capacity prices and the related market feedback effects on plant economics have rarely been investigated, according to Brattle.

It is likely that reduced supply for power generation, increased operating costs and changes in fuel demands will drive up market prices. It is also likely that, because of the uncertainty and time frames for these retirement decisions, not all of these impacts are currently reflected in public forecasts or market forward prices.

In addition to energy price impacts of coal plant retirements, the study includes a qualitative assessment of impacts on capacity prices. The first effect would be to reduce the total supply of capacity in that region until replacement resources come online, hence reducing the reserve margins. This would tend to increase the capacity prices in the short to medium term.

The second effect of retirements would be to decrease net CONE in capacity markets as a result of the higher energy prices. This would tend to decrease the long-run equilibrium price of capacity until the energy price impacts of retirements disappear. The study also notes that other waves of entry or exit, such as large commitments to renewable energy, or early retirements of nuclear power units, could trigger similar feedback effects.

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