Luminant to Retire Three Coal Plants
November 07, 2017
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Luminant Coal Plant

Over the past two weeks, Luminant announced the closing of nearly 4,200 MW of coal fired power generation units at 3 different plants in Texas. On October 6th, Luminant made public its plan to close the Monticello plant, then on October 13th it announced it would also be closing the Big Brown and Sandow plants as well with all three closures occurring early in 2018. All of these plants are in the North Zone of the ERCOT market and have been the subject of speculation about their economic viability. Over the past several years, the coal plants have struggled to compete with low cost natural gas fired generation as well as growing wind generation capacity. Luminant cited these challenging market conditions in making the announcements.

The impact to the ERCOT market of these retirements is significant. The three plants combined represent just over 5% of the generation capacity in ERCOT, and their energy contribution is closer to 10% due to the continuous operational pattern of coal fired plants. Removal of these units from the ERCOT market will reduce projected reserve margins from a comfortable 16%-17% to a much tighter 10%-11% for 2018 through 2021. It is possible that ERCOT may require one or more of the units to remain online for reliability reasons, but that won’t be known for several months.

Not surprisingly, power prices and heat rates in ERCOT reacted bullishly to the news. Power prices for calendar year strips moved up about $1.00 / MWh after the first announcement, then moved up a further $1.50 / MWh after the second announcement for a total increase of about $2.50 compared to price levels prior to the announcement (see the chart below.) This move was largely driven by heat rate increases that totaled between 1 and 1.5 heat rate points across different calendar year terms. The increases were strongest in the peak summer months, with prices in those months moving up $4.00 / MWh. Near term 2018 power prices and heat rates were the most affected reflecting the inability for new power plants to come online in 2018 that are not already in the development process.

Luminant Coal Plant

In addition to the Luminant plants, there are several other coal fired power plants in ERCOT that are the subject of closure rumors. Some are owned by merchant generators like Luminant and others are owned by municipally owned utilities and cooperatives. It’s expected that there will be additional retirements in the coming years due to economic pressures as well as the possibility of carbon regulation. As always, please contact your Energy Edge consultant to discuss how changing market conditions impact your energy strategy, and we will be reaching out to you as well.