By Tom Kleckner
AUSTIN, Texas — Vistra Energy’s acknowledgement last month that it may retire some of its coal fleet sparked a lively debate among speakers at Infocast’s Texas Renewable Energy Summit last week.
Like other coal and nuclear units in ERCOT, the plants operated by Luminant, Vistra’s generating division, are often priced out of a market in which cheap gas has sent energy prices to record lows.
Luminant’s three 1970s-era coal-fired plants — Big Brown, Martin Lake and Monticello, which total almost 5.3 GW of capacity — have capacity factors ranging from 44 to 59%, leading to speculation that some or all the plants may be retired. During the company’s second-quarter call in early August, CEO Curt Morgan told analysts, “Any decisions related to optimization of Luminant’s generation fleet will likely be made in the fourth quarter.”
Neel Mitra, director of utilities and power research for Tudor, Pickering, Holt & Co., a Houston-based investment and merchant bank focused on the energy industry, told the conference Monday he expects Vistra will retire two of the three plants.
Others weren’t as bearish on ERCOT’s coal fleet.
“We’ve been hearing rumors about coal plant retirements for several years now,” said Morgan Stanley Capital’s Clayton Greer, who sits on ERCOT’s Technical Advisory Committee.
Tim Wang, a director with Filsinger Energy Partners, said the outlook has changed for fossil plants with the Clean Power Plan’s future in doubt.
“Prior to the 2016 elections, I thought it was definite we would see retirements fairly soon, but that’s gone away,” Wang said. “Really now, it’s just about economics. If you look at [Vistra’s] portfolio, you say, ‘If they retire those plants, what will they be left with?’
“If I were them, and a rational player, I’d say, ‘We need to acquire gas plants. We need to acquire gas before their valuations go up.’ Otherwise, you’re helping your competitors.”
Indeed. In recent months, Vistra has completed the purchase of a 1,054-MW combined cycle combustion turbine in Odessa and acquired two other combined cycle plants representing another 3 GW of capacity. Luminant now has almost as much gas capacity (7.5 GW) as it does coal (8 GW). All told, Luminant has about 18 GW of capacity.
Healthy Reserve Margins
Mitra’s comments came while he discussed ERCOT’s healthy reserve margins. The ISO currently has an 18.9% reserve margin, which it expects to drop to 16.8% in 2022, based on new builds and potential retirements. In its most recent Seasonal Assessment of Resource Adequacy, the ISO said it has nearly 86 GW of capacity available this winter, more than enough to meet a predicted peak demand of just more than 56 GW. (See “Seasonal Forecasts: Sufficient Generation for Fall, Winter,” ERCOT Briefs.)
ERCOT has more than 68.7 GW of thermal capacity, but wind energy now accounts for almost 20 GW of capacity and solar for another 944 MW. The continued influx of renewable resources has helped push inefficient fossil plants into seasonal or mothball status, as they are unable to compete with zero-marginal-cost wind during off-peak hours.
Only two coal plants in the ERCOT market are covering their fixed costs on an around-the-clock open-price basis, Mitra said, pointing to Luminant’s Sandow 5 unit east of Austin and its twin 800-MW units at Oak Grove, north of Houston. The units came online in 2009 and 2010.
Beth Garza of Potomac Economics, ERCOT’s Independent Market Monitor, said there is a lot of existing generation that is not recovering its costs.
“We’re in a sweet spot right now with lots of reserve and very low prices,” she said. “At some point, that has to change. We will see retirements and mothballs. The fear is, we’ll see lots of that happening at once and upsetting that balance.”
Mitra said he believes Vistra has been discussing an “orderly retirement plan” with ERCOT. However, an ISO spokesperson would only say the retirement process “officially begins” when a generation owner sends a notice of suspension of operations to ERCOT. Luminant declined to comment beyond Morgan’s statement.
Reliability Impact
“The regulators will have to start worrying about [retirements] relatively soon,” Mitra warned. He suggested improvements could be made to ERCOT’s operating reserve demand curve, which creates a real-time price adder reflecting the value of available reserves.
“In concept, it works pretty great. But in reality, you want to have increases to scarcity pricing in the summer, and we haven’t had that yet,” Mitra said. “[The ORDC] has to be a little bit more aggressive to incent new generation or coal plants to stay online. There has to be some sort of a reliability scare, but we haven’t really had one since 2011.”
Even if all three Vistra plants are retired, Mitra noted, it will only drop ERCOT’s reserve margin to 9.5%. He expects the market to tighten soon, given his belief that Vistra will retire coal generation, but only for on-peak hours. Wind generation will “continue to flood the ERCOT market during off-peak hours,” Mitra said.
Vistra emerged from Energy Future Holdings’ Chapter 11 bankruptcy in November as a tax-free spinoff. Long known as Texas Utilities and then TXU, the company was acquired in 2007 by EFH and its consortium of private-equity investors through a leveraged buyout. The deal went sour when energy prices collapsed, and EFH filed for bankruptcy in April 2014.
