Steep environmental costs mean coal-fired power's competitive edge will drop by half.

A mid increasing pressures to reduce costs, the competitive positions and profitability of U.S. coal-fired power plants will change dramatically in the near-term. Resource Data International Inc. examined this change within its recently released study, "Coal-Fired Generation in Competitive Power Markets."

The study identifies plants whose competitive position and profitability will change from 1998 to 2003 as a result of moving coal and transportation contracts to market levels and complying with environmental standards. The study also identifies how such changes will position each plant against combined-cycle additions.

RDI projects additional environmental costs will increase overall coal-fired power production costs by nearly $3 per megawatt-hour by 2003, thereby reducing coal's advantage over gas combined-cycle units by half. Despite this, RDI forecasts total coal-fired generation will increase 7.8 percent from 1998 to 2003, while total utility generation will grow 7.2 percent. Moreover, generation from coal-fired plants in all North American Electric Reliability Council regions will increase, with some regions experiencing 13 percent to 14 percent increases from 1998 to 2003.

However, the additional cost of environmental compliance, combined with the arrival of approximately 50,000 megawatts of new gas combined-cycle units by 2003, means that some coal-fired units will be displaced in the dispatch order by new combined-cycle units. At-risk coal-fired plants are likely to be smaller, less efficient and higher-cost units located east of the Mississippi River, where the additional costs of NOx compliance increase power production costs - sometimes above that for combined-cycle units.

Although RDI forecasts that one-fourth of all utility coal-fired capacity will have higher operating costs than new gas units by 2003, the level of generation displacement differs by region depending on load growth and the amount of gas-fired capacity additions expected in the region. At-risk coal-fired units in the Midwest and East likely will bear the brunt of competitive forces. These units are forecast to decrease generation slightly from 1998 to 2003. However, at-risk coal-fired units in all other regions are anticipated to either maintain or slightly increase generation during the period.

Coal-fired generation will be impacted more during intermediate and off-peak periods, thereby softening the impacts of displacement on plant profitability. The same cannot be said of the subsequent impacts on upstream coal providers. For these companies, a lost ton of coal translates into lost revenues and profits.

Chris Leshock is a senior consultant and Patrick Wright is a consultant in the coal consulting group at RDI. For more information on the study, contact RDI's Chuck Van Note at 303-444-7788.

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