A large number of coal plants are expected to retire within the next five years. Generation companies that operate coal-fired facilities must carefully make and execute the decommissioning decision to ensure more than just financial prudence. The human element of retiring an older coal plant requires careful consideration and execution to ensure employees are treated fairly, regulators are provided adequate notice, and the company’s public perception is not harmed. In this article, ScottMadden explores the drivers of coal plant closures and recommends the approach generation companies should use to ensure equity and management control throughout the decommissioning process.

Overview

The United States is entering a new era of electric generation. Coal, once the dominant fuel of choice in U.S. generation, has recently been decreasing in popularity. In 2015, natural gas and coal both supplied just over one-third of U.S. generation^[1]. However, the Energy Information Administration (EIA) predicts that natural gas could surpass coal as a percentage of total U.S. production by the end of 2016.

As a result of the directional change to cleaner energy (like natural gas), it is estimated that a minimum of 40GW of coal-fired capacity, nearly 15% of the country’s existing coal-fired capacity, will be retired by 2020^[2]. However, if the Environmental Protection Agency’s (EPA) Clean Power Plan (CPP) is upheld by the U.S. Supreme Court, the EIA has projected that an additional 50GW of coal-fired capacity will be retired by 2040.

Exhibit A: EPA-Projected Coal Capacity Retirements under 111d Proposal* (CPP) between 2016 and 2020

There are five primary reasons why generation companies are reassessing the future of their coal-fired assets.

1. Environmental Compliance Costs: Compliance with regulations such as the Cross-State Air Pollution Rule, the Cooling Water Intake Rule (316b), the Coal Combustion Residual Rule, and the proposed CPP will significantly increase the cost of operating a coal-fired plant. While it is difficult to project the actual costs for individual operators to become compliant with these new regulations, the EPA has estimated that the annual compliance costs for the CPP will be approximately $8.4 billion.^[5] Industry and business groups have argued the cost estimates provided by the EPA are far too conservative and project the costs of compliance to be higher by several multiples.

2. Natural Gas Prices: The abundant supply of domestic natural gas reserves has reduced the cost of the fuel, making it more attractive for use in electricity generation. By 2040, natural gas-fired generation is projected to comprise approximately 31% of the power generated in the U.S., rivaling coal as the largest single contributor.^[6]

3. Cost Competitiveness of Renewables: Renewable energy is rapidly becoming a more cost-competitive source of generation, benefiting from technological advances, state renewable portfolio standards and related policies, and (in the case of wind and solar) favorable tax treatment.

4. Aging Units: The majority of U.S. coal capacity was built between 1970 and 1990. The average age of all operating coal units is currently 42 years, and 86% are more than 25 years old. These units are fully depreciated, facilitating the retirement decision.

5. Public Perception of Coal: The public perception of coal-fired generation has become more negative over time. The process of burning coal to generate electricity has increasingly been targeted by a wide range of groups that argue the practice is one of the primary causes of climate change and other public health problems, particularly respiratory ailments like asthma.

Executives who are choosing to decommission a coal-fired generation plant have a number of decisions to make—from the desired end-state of the plant to the approach and timing of the decommissioning process. Generation companies that have executed this process well in the past utilized a comprehensive planning process that ensured there was a well-thought-out plan in place and that it involved the right people at the right time. Typically, the financial decisions are the easy part. It is the people side of the process that can be trickier and may require a more thoughtful approach to ensure overall success.

This article recommends a three-phase process for planning a successful plant decommissioning. It is based on ScottMadden’s experience helping a variety of generators with their decommissioning projects. Our experience has shown that a comprehensive and well-thought-out execution plan proves to be better for financial, human capital, and operational outcomes (for the remainder of the plant’s life) for the generation company. The plan should encompass the timespan from prior to the public announcement of the closure through the desired end-state of the plant. While the plan should be tailored to the specific needs of the plant and allow for some flexibility, ScottMadden recommends a three-phase process: Project Set-up, Design and Detailed Planning, and Plan Execution.

Exhibit B: Phases of a Successful Plant Closure

Phase 1: Project Set-up

Upon deciding to close a coal-fired power plant, it is vital that management quickly engage in a comprehensive planning process prior to the public announcement of the closure. The first step is to develop a project charter for the effort that defines the scope, timing, roles/ accountabilities, and milestones for the decommissioning project. There are two primary work streams: the human element and the market element. The human element includes many considerations, such as the announcement method, message content and timing, plan for staffing to shutdown, Worker Adjustment and Retraining (WARN) Act notice period and state notifications (if applicable), and multiple other details. The market element includes elements like economic decisions and alternatives for the final state of the unit (e.g., mothballing the asset, decommissioning, returning the site to brown/greenfield for future development, etc.), proper accounting, market/ RTO notification, salvage opportunities, environmental requirements, etc. Effective generation owners employ a project management approach to surface, research, and make decisions based on the company’s unique situation.

Once the scope has been defined, the next step is to develop small cross-functional teams to plan the details for the closure. These teams should include individuals with expertise from areas across the enterprise including HR, Plant Operations/Maintenance, Finance, Accounting, Legal, Regulatory, Communications, etc. When establishing these teams, it is vital that senior leadership communicates the importance and confidentiality of the plant closing initiatives and that the team should not share any information until instructed to do so by the executive sponsor.

Next, the teams should engage in initial planning activities which include identifying major issues relating to the closure and developing individual work plans to address these issues. The work of the teams should be broad spectrum and include: developing materials that communicate the closure of the plant; providing adequate information and resources to internal and external stakeholders; establishing strategies to ensure the operational continuity for the remainder of the plant’s operating life; developing processes for engaging in reduction-of-force activities; and identifying/engaging third-party contractors to assist in the demolition/deconstruction of the facility (if the decision is to demolish the site).

ScottMadden strongly recommends that the initial planning process takes place prior to the closure announcement. A plant closure will have wide-ranging impacts on both individuals and the community. Each impact should be identified and assessed prior to publicly announcing the closure, as each will need to be messaged appropriately. For example, ScottMadden worked with one owner to plan the closure of a plant that was the largest employer in the community. Management made the decision to work proactively with the political leadership of the impacted area to address their specific concerns, including jobs and impacts to property taxes. While engaging in Phase 1 activities will not eliminate all potential problems, having teams from across the enterprise who are thinking through these impacts, and actively engaging in the planning process prior to the announcement, can ultimately result in a smoother plant closure.

Phase 2: Design and Detailed Planning

Where Phase 1 was focused on the big picture and issue identification, Phase 2 focuses on designing and developing detailed execution plans for key functional areas (e.g., Communications, HR, Finance, and Regulatory) and significant stakeholder groups (e.g., state commissions, RTOs, political leaders, community groups, etc.). As part of the process, it is imperative to identify and plan for interdependencies. As a result of the expanded work associated with Design and Detailed Planning (Phase 2) and Plan Execution (Phase 3), we recommend additional resources be added to the small Phase 1 project teams. During this phase, decommissioning project work occurs separately, but in parallel, with day-to-day operations. To highlight activities during this stage, below is an example of the key elements associated with the Communications function.

Phase 3: Plan Execution

The Plan Execution phase takes the project team beyond the initial announcement into a structured project management process. This provides the necessary structure to fulfill the defined project scope and timing objectives while not compromising ongoing generation activities (assuming the plant will remain in operation for some period of time post-closure announcement). Safe and efficient operations are still the top priority at generating stations during the decommissioning process. Major milestones should be tracked and reported to key stakeholders to ensure progress is in line with expectations.

Decommissioning a generating asset is expensive and can become untenable if planning is poor and lacks executional rigor. The key to controlling costs is to strategically control the decommissioning process. The planning process should involve a thorough evaluation of all options and scenarios and include success metrics and milestones. Project leads should develop robust decommissioning plans that allow for reassessment of options in case of significant changes in legislation, the operating environment (demand), and/or operating costs. Once the unit has been decommissioned, Phase 3 ends. That said, additional work is required in many areas, including deconstruction, environmental remediation, sale of assets, and the potential transfer of property to a third party. Again, it is essential that management fully plan post-operation activities to ensure success.