oversight

Electricity: Significant Changes Are Expected in Coal-Fueled Generation, but Coal is Likely to Remain a Key Fuel Source

Published by the Government Accountability Office on 2012-10-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States Government Accountability Office

GAO            Report to the Chairman, Committee on
               Commerce, Science, and
               Transportation, U.S. Senate


October 2012
               ELECTRICITY

               Significant Changes
               Are Expected in Coal-
               Fueled Generation,
               but Coal is Likely to
               Remain a Key Fuel
               Source




GAO-13-72
                                             October 2012

                                             ELECTRICITY
                                             Significant Changes Are Expected in Coal-Fueled
                                             Generation, but Coal Is Likely to Remain a Key Fuel
                                             Source
Highlights of GAO-13-72, a report to the
Chairman, Committee on Commerce, Science
and Transportation, U.S. Senate




Why GAO Did This Study                       What GAO Found
Coal is a key domestic fuel source and       Retirements of older units, retrofits of existing units with pollution controls, and
an important contributor to the U.S.         the construction of some new coal-fueled units are expected to significantly
economy. Most coal produced in the           change the coal-fueled electricity generating fleet, making it capable of emitting
United States is used to generate            lower levels of pollutants than the current fleet but reducing its future electricity
electricity. In 2011, 1,387 coal-fueled      generating capacity. Two broad trends are affecting power companies' decisions
electricity generating units produced        related to coal-fueled generating units—recent environmental regulations and
about 42 percent of the nation's             changing market conditions, such as the recent decrease in the price of natural
electricity. After decades of growth,        gas. Regarding retirements, forecasts GAO reviewed based on current policies
U.S. coal production and consumption
                                             project that power companies may retire 15 to 24 percent of coal-fueled
have fallen, primarily due to declines in
                                             generating capacity by 2035––an amount consistent with GAO's analysis. GAO’s
the use of coal to generate electricity.
                                             statistical analysis, examining data on power companies that have announced
According to the Environmental               plans to retire coal-fueled units, found that these power companies are more
Protection Agency (EPA), using coal to       likely to retire units that are older, smaller, and more polluting. For example, the
generate electricity is associated with      units companies plan to retire emitted an average of twice as much sulfur dioxide
health and environmental concerns            per unit of fuel used in 2011 as units that companies do not plan to retire. Based
such as emissions of sulfur dioxide, a       on the characteristics of the units companies plan to retire, GAO estimated
pollutant linked to respiratory illnesses,   additional capacity that may retire. In total, GAO identified 15 to 18 percent of
and carbon dioxide, a greenhouse gas         coal-fueled capacity that power companies either plan to retire or that GAO
linked to climate change. In response        estimated may retire—an amount consistent with the forecasts GAO reviewed.
to recent environmental regulations
                                             Regarding retrofits, the coal-fueled generating fleet may also become less
and changing market conditions, such
                                             polluting in the future as power companies install controls on many remaining
as the recent decrease in the price of
natural gas, power companies may             units. Regarding new coal-fueled units, these are likely to be less polluting as
retire some units, which could affect        they must incorporate advanced technologies to reduce emissions of regulated
the coal fleet’s generating capacity––       pollutants. Coal-fueled capacity may decline in the future as less capacity is
the ability to generate electricity––and     expected to be built than is expected to retire.
the amount of electricity generated          According to stakeholders and three long-term forecasts GAO reviewed, coal is
from coal. Power companies may also          generally expected to remain a key fuel source for U.S. electricity generation in
retrofit some units by installing controls
                                             the future, but coal’s share as a source of electricity may continue to decline. For
to reduce pollutants.
                                             example, in its forecast based on current policies, the Energy Information
GAO was asked to examine (1) how             Administration (EIA) forecasts that the amount of electricity generated using coal
the fleet of coal-fueled electricity         is expected to remain relatively constant through 2035, but it forecasts that the
generating units may change in the           share of coal-fueled electricity generation will decline from 42 percent in 2011 to
future in terms of its generating            38 percent in 2035. Available information suggests that the future U.S. use of
capacity and other aspects and (2) the       coal may be determined by several key factors, including the price of natural gas
future use of coal to generate               and environmental regulations. For example, available information suggests that
electricity in the United States and key     the price of coal compared with other fuel sources will influence how
factors that could affect it. GAO            economically attractive it is to use coal to generate electricity. EIA assessed
conducted a statistical analysis of
                                             several scenarios of future fuel prices and forecasts that coal’s share of U.S.
plans for retiring coal-fueled units,
                                             electricity generation will fall to 30 percent in 2035 if natural gas prices are low or
interviewed stakeholders, and
reviewed information on industry plans
                                             40 percent if natural gas prices are high. In addition, some stakeholders told
and long-term forecasts by EIA and           GAO that the future use of coal could be significantly affected if existing
others. GAO is not making any                environmental regulations become more stringent or if additional environmental
recommendations in this report.              regulations are issued. For example, EIA forecasts that two hypothetical future
                                             policies that reduce carbon dioxide emissions from the electricity sector by 46
View GAO-13-72. For more information,        percent and 76 percent would result in coal's share of U.S. electricity generation
contact Frank Rusco at (202) 512-3841 or     falling to 16 and 4 percent in 2035, respectively.
ruscof@gao.gov.
                                             EPA provided technical comments that were incorporated as appropriate.
                                                                                       United States Government Accountability Office
Contents


Letter                                                                                             1
                       Background                                                                 5
                       Retirements, Retrofits, and New Construction May Result in a
                         Smaller but Cleaner Coal-Fueled Electricity Generating Fleet            10
                       Coal Likely to Remain a Key Fuel Source, but Future Use May Be
                         Affected by Fuel Prices, Environmental Regulations, and Other
                         Factors                                                                 21
                       Agency Comments and Our Evaluation                                        31

Appendix I             Analysis of Characteristics of Coal-Fueled Generating Units That Power
                       Companies Plan to Retire                                               33
                       Methodology                                                               33
                       Results                                                                   36
                       Analysis Indicates Units Power Companies Likely to Consider
                         Retiring                                                                39
                       Limitations and Alternative Model Specifications                          41

Appendix II            Description of Selected Scenarios and Forecasts                           45



Appendix III           GAO Contact and Staff Acknowledgments                                     47



Related GAO Products                                                                             48



Tables
                       Table 1: Results of EIA Alternate Fuel Price Scenarios                    27
                       Table 2: Regression Results of Characteristics Associated with
                                Planned Coal-Fueled Unit Retirements–Dependent
                                Variable Is the Probability of a Unit Retirement
                                Announcement                                                     37
                       Table 3: Effect of 10% Change in a Variable Value on the Probability
                                of an Average Unit’s Planned Retirement When Owned by
                                a Power Company in a Restructured Marked                         38
                       Table 4: Effect of 10% Change in a Variable Value on the Probability
                                of an Average Unit’s Planned Retirement When Owned by
                                a Traditionally Regulated Power Company                          38



                       Page i                                                   GAO-13-72 Electricity
          Table 5: Coal-Fueled Units That Companies May Consider for
                   Retirement by 2020                                               40
          Table 6: Regression Results of Characteristics Associated with
                   Planned Coal-Fueled Unit Retirements Using Clustered
                   Standard Errors                                                  43
          Table 7: Regression Results of Characteristics Associated with
                   Planned Coal-Fueled Unit Retirements Including Adjusted
                   Marginal Cost and Interaction Term                               44
          Table 8: Description of EIA, IHS Global Insight, and IEA Scenarios
                   and Forecasts                                                    45


Figures
          Figure 1: Coal Production and Employment, 1960-2011                        5
          Figure 2: Electricity Generation from Coal, 1960-2010                      6
          Figure 3: U.S. Coal Exports by Destination, 2001-2011                      9
          Figure 4: Capacity of Coal-Fueled Units by Year of First
                    Commercial Operation and Planned Retirements                    12
          Figure 5: Number of Coal-Fueled Electricity Generating Units by
                    Capacity Category                                               14
          Figure 6: Number of Coal-Fueled Electricity Generating Units by
                    2011 SO 2 Emissions Rate                                        16
          Figure 7: Capacity of Planned Coal-Fueled Electricity Generating
                    Units by Status, as of July 26, 2012                            19
          Figure 8: Actual 2011 and Projected 2035 Coal-Fueled Electricity
                    Generating Capacity                                             20
          Figure 9: EIA’s Reference Scenario Projections of Electricity
                    Generation by Fuel                                              22
          Figure 10: Actual 2010 and EIA’s Reference Scenario Projected
                    2035 Coal Production by Region                                  24
          Figure 11: Actual and Projected Coal and Natural Gas Prices               26




          Page ii                                                  GAO-13-72 Electricity
Abbreviations
Btu        British thermal unit
CO 2       carbon dioxide
EIA        Energy Information Administration
EPA        Environmental Protection Agency
IEA        International Energy Agency
MW         megawatt
MWh        megawatt-hour
NO x       nitrogen oxides
SO 2       sulfur dioxide




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Page iii                                                              GAO-13-72 Electricity
United States Government Accountability Office
Washington, DC 20548




                                   October 29, 2012

                                   The Honorable John D. Rockefeller IV
                                   Chairman
                                   Committee on Commerce, Science, and Transportation
                                   United States Senate

                                   Dear Mr. Chairman:

                                   Coal is a key domestic fuel source and an important contributor to the
                                   U.S. economy. The United States has the largest recoverable coal
                                   reserves in the world, according to the Energy Information Administration
                                   (EIA). 1 In 2011, about 86,200 workers around the country produced more
                                   than 1 billion tons of coal, and more than 90 percent of this coal was used
                                   to generate electricity in the United States. 2 Also in 2011, there were
                                   1,387 coal-fueled electricity generating units with a total of 317,469
                                   megawatts (MW) of capacity—a measure of the ability to generate
                                   electricity 3—about 30 percent of total generating capacity in the United
                                   States. These coal-fueled units generated 42 percent of the nation’s
                                   electricity in 2011. 4 After decades of growth—peaking in 2008—U.S. coal
                                   production has fallen, primarily due to declines in the use of coal to
                                   generate electricity. Some stakeholders expressed concern, if this trend
                                   were to continue, about the implications on electricity systems,




                                   1
                                    EIA is a statistical agency within the Department of Energy that collects, analyzes, and
                                   disseminates independent information on energy issues.
                                   2
                                    The rest of production was exported or used for other purposes, including steel
                                   production. In addition to coal, electricity is produced using other fossil fuels, particularly
                                   natural gas; through nuclear fission; and using renewable sources, including hydropower,
                                   wind, geothermal, and solar energy.
                                   3
                                    Generating capacity is measured in MW and refers to the maximum capability of a unit to
                                   produce electricity. A unit with 1,000 MW of capacity can generate up to 1,000 megawatt-
                                   hours (MWh) of electricity in 1 hour, enough to provide electricity for up to 1 million homes.
                                   There are many measures of capacity, and we generally refer to net summer capacity in
                                   this report—a generating unit’s capacity to produce electricity during the summer when
                                   electricity demand for many electricity systems and losses in efficiency are generally the
                                   highest. Net capacity data excludes output used internally for plant operations.
                                   4
                                    Electricity generation depends on the capacity of generating units and how often and to
                                   what extent units are operated.




                                   Page 1                                                                   GAO-13-72 Electricity
communities, and economies that rely on coal mining and coal-fueled
electricity.

Using coal to generate electricity has been associated with human health
and environmental concerns by the Environmental Protection Agency
(EPA), the primary federal agency responsible for implementing many of
the nation’s environmental laws. For example, according to EPA data,
coal-fueled electricity generating units are among the largest emitters of
sulfur dioxide (SO2) and nitrogen oxides (NOx), which have been linked to
respiratory illnesses and acid rain. EPA recently proposed or finalized
several regulations, as required or authorized, that aim to address certain
health or environmental impacts associated with coal-fueled electricity
generating units. In response to these regulations, power companies
might retrofit some units by installing controls to reduce pollutants or by
taking other steps to reduce adverse impacts. 5 When it is not economic to
take these actions, power companies may retire some units, which could
affect coal-fueled generating capacity and the amount of electricity
actually generated from coal. We recently reported on the price and
reliability implications of key recent EPA regulations. 6 In addition,
according to EPA data, coal-fueled electricity generating units emit large
quantities of carbon dioxide (CO2). As we have previously reported,
compared with natural gas-fueled units, coal-fueled units produced, on
average, over twice as much CO2 per unit of electricity produced as
natural gas units in 2010. 7 The National Research Council 8 has stated
that emissions of CO2 and other greenhouse gases are linked to climate
change. There have been a number of legislative proposals in Congress,
regulatory action by EPA, and actions at the state and local levels aiming
to reduce CO2 emissions.




5
 Compliance with regulations may involve using various technologies or making
infrastructure changes to reduce adverse impacts; for example, installing liners at facilities
used to store coal combustion wastes to minimize leaching of contaminants into
groundwater.
6
 GAO, EPA Regulations and Electricity: Better Monitoring by Agencies Could Strengthen
Efforts to Address Potential Challenges, GAO-12-635 (Washington, D.C.: July 17, 2012).
7
 See GAO, Air Emissions and Electricity Generation at U.S. Power Plants, GAO-12-545R
(Washington, D.C.: Apr. 18, 2012).
8
 The National Research Council is the principal operating agency of both the National
Academy of Sciences and the National Academy of Engineering.




Page 2                                                                  GAO-13-72 Electricity
You asked us to examine the future use of coal to generate electricity.
Our objectives for this report were to examine what available information
indicates about: (1) how the nation’s fleet of coal-fueled electricity
generating units may change in the future in terms of its generating
capacity and other aspects and (2) the use of coal to generate electricity
in the United States in the future and key factors that could affect it.

To examine how the coal-fueled generating fleet may change, we used
data from Ventyx Velocity Suite, a proprietary database containing
consolidated energy and emissions data from EIA, EPA, and other
sources. We used data as of July 27, 2012, to describe characteristics of
coal-fueled electricity generating units and to provide information on
power companies’ plans to retire coal-fueled units and build new ones.
Such information reflects publicly reported plans as identified by Ventyx.
As plans may change, the actual number and characteristics of future
retirements and new construction of coal-fueled units may differ from
what is represented in Ventyx as of July 2012. To assess the types of
units that may be retired, we carried out a statistical analysis of units
owned by power companies that have announced plans to retire coal-
fueled units. We analyzed various characteristics including characteristics
of the unit (i.e., size and age) and the characteristics of the power
company that owns the unit (i.e., whether it is traditionally regulated or
operates in a restructured market). 9 We then examined units owned by
companies that have not announced any planned retirements in order to
estimate how many of those units companies may consider retiring. Our
statistical analysis did not examine the amount of electricity that may be
generated at coal-fueled units in the future. Appendix I provides further
information about our statistical analysis. To provide information about the
use of coal to generate electricity in the future and key factors that could
affect it, we reviewed forecasts from EIA, the International Energy Agency




9
 In some areas of the country, referred to as “traditionally regulated markets,” state public
utility commissions—which generally aim to ensure retail electricity rates are just and
reasonable—review power companies’ requests to recover the costs of investments in
new generating units, distribution lines, and other system upgrades. Once a state public
utility commission approves a power company’s request, consumer retail prices are
adjusted to recover the power company’s costs plus a rate of return. In other areas of the
country, referred to as “restructured markets,” electricity is sold by multiple companies
competing with each other. In these areas, public utility commissions play a more limited
role in overseeing generation. Consumers pay retail electricity rates based on the price of
electricity as determined in wholesale markets.




Page 3                                                                  GAO-13-72 Electricity
(IEA) 10 and IHS Global Insight, 11 and summarized projections of coal-
fueled electricity generation under different scenarios. Appendix II
summarizes the scenarios we examined. While long-term forecasts are
subject to inherent uncertainties, we found the EIA, IEA and IHS Global
Insight forecasts to be reasonable for describing what is known about the
potential future use of coal to generate electricity. To respond to both
objectives, we reviewed available literature, including studies by federal
agencies and research organizations, and summarized the results of
semistructured interviews with a nonprobability sample of 36
stakeholders. Stakeholders included representatives from power
companies, a coal company, and nongovernmental organizations, and
officials from federal and state agencies. We selected these stakeholders
to be broadly representative of differing perspectives on these issues
based on recommendations from agencies and industry associations,
along with other information. Because we used a nonprobability sample,
the views of these stakeholders are not generalizable to all potential
stakeholders, but they provide illustrative examples of views. To provide
information on recent electricity industry trends, we summarized historical
data from EIA. To assess the reliability of Ventyx and EIA historical data,
we reviewed existing documentation, interviewed Ventyx and EIA staff,
consulted with agency officials and other knowledgeable parties,
conducted some electronic testing, and compared data in Ventyx to
information obtained from several power companies and regional
transmission organizations. We determined the Ventyx and EIA data to
be sufficiently reliable for the purposes of this report. Some numbers in
this report have been rounded.

We conducted our work from July 2011 to October 2012 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on
our audit objectives.


10
  IEA is an international organization composed of 28 of the member nations of the
Organisation for Economic Co-operation and Development that, among other things,
collects energy data and provides research and analysis on ways to ensure reliable,
affordable, and clean energy.
11
  IHS Global Insight is a firm that provides comprehensive economic and financial
information on countries, regions, and industries.




Page 4                                                              GAO-13-72 Electricity
             Because of its abundance and historically low cost, coal is an important
Background   fuel source in the United States, accounting for about 20 percent of total
             energy use in 2011. Nearly all coal consumed in the United States is
             produced domestically, and coal represents about 29 percent of all
             domestically produced energy. U.S. coal production generally increased
             since 1960 and reached its highest level in 2008. Advancements in
             mining technology and a shift to using surface mines to a greater extent
             than underground mines has boosted coal’s overall productivity and
             enabled production to increase even as the number of workers
             decreased. In 2011, half as many workers produced 24 percent more coal
             than in 1985, as shown in figure 1. Data from the Bureau of Labor
             Statistics indicate that about 86,200 people were employed in coal mining
             in the United States in 2011.

             Figure 1: Coal Production and Employment, 1960-2011




             In the United States, coal is primarily used to generate electricity—over
             90 percent of coal was used to generate about 42 percent of electricity in
             2011. The amount of electricity generated using coal has generally
             increased since the 1960s, but decreased recently due to a combination
             of a decline in overall electricity demand, shifts in the relative prices of



             Page 5                                                     GAO-13-72 Electricity
fuels, and other reasons. (See fig. 2.) Meanwhile, coal’s share of total
electricity generation has fluctuated over time. EIA has stated that several
factors, including low oil prices during the late 1960s—which served to
increase electricity generation from oil—and the oil price shocks of the
1970s have influenced the mix of fuel sources used to produce electricity.

Figure 2: Electricity Generation from Coal, 1960-2010




Note: Net generation excludes electricity generation that is used internally for plant operations.


Two broad trends—recent environmental regulations and changing
market conditions—are affecting power companies’ decisions related to
coal-fueled electricity generating units. Regarding environmental
regulations, as we have previously reported, since June 2010, EPA
proposed or finalized several regulations that would reduce certain
adverse health or environmental impacts, including impacts associated




Page 6                                                                           GAO-13-72 Electricity
with coal-fueled electricity generating units. 12 These regulations have
potentially significant implications for public health and the environment.
One of the most significant regulations in terms of EPA’s estimated
benefits and costs, EPA’s Mercury and Air Toxics Standards, establishes
emissions limitations on mercury and other toxic pollutants. Mercury is a
toxic element, and human intake of mercury, for example, through
consumption of fish that ingested the mercury, has been linked to a wide
range of health ailments. In particular, mercury can harm fetuses and
cause neurological disorders in children, resulting in, among other things,
impaired cognitive abilities. Other toxic metals emitted from power plants,
such as arsenic, chromium, and nickel can cause cancer. EPA estimates
that its finalized regulation would reduce mercury emissions from coal-
fueled electricity generating units by 75 percent, as well as reduce SO2
and other emissions. EPA estimated the benefits of this one regulation
would be $39 to $96 billion with costs of $10.2 billion in 2016 (in 2011
year dollars). The requirements and deadlines these regulations may
establish for generating units are uncertain. In particular, several
regulations have not been finalized, and finalized regulations could be
subject to legal challenges that result in changes. For example, EPA
finalized the Cross-State Air Pollution Rule in August 2011. The
regulation would have required reductions of certain emissions of air
pollutants in 28 states because some of these pollutants may travel in the
atmosphere and impact air quality in other states. The U.S. Court of
Appeals for the D.C. Circuit recently struck down the regulation, and EPA
has asked the full court to rehear the case, creating uncertainty as to
what may be required from generating units in the future to address such




12
  See GAO-12-635. Specifically, these include the Cross-State Air Pollution Rule, which
would have prohibited certain emissions of air pollutants in 28 states because of the
impact they would have on air quality in other states; the National Emissions Standards for
Hazardous Air Pollutants from Coal and Oil Fired Electric Utility Steam Generating Units,
also known as the Mercury and Air Toxics Standards, which establishes emissions
limitations on mercury and other toxic pollutants; the proposed Cooling Water Intake
Structures at Existing Facilities and Phase I Facilities regulation, which would establish
requirements for water withdrawn and used for cooling purposes that reflect the best
technology available to minimize adverse environmental impact; and the proposed
Disposal of Coal Combustion Residuals from Electric Utilities regulation, which would
govern the disposal of coal combustion residuals, such as coal ash, in landfills or surface
impoundments. On April 13, 2012, EPA also proposed new source performance standards
for greenhouse gas emissions from certain new fossil fuel electricity generating units—
including coal-fueled units—but the standards would not apply to existing units.




Page 7                                                               GAO-13-72 Electricity
emissions. 13 In response to these regulations, power companies might
retrofit generating units with controls to reduce pollutants and, when it is
not economic to retrofit, may retire some generating units.

Regarding broader market conditions, important market drivers have
been weighing on the viability of coal-fueled electricity generating units.
Key among these has been the recent decrease in the price of natural
gas, which has made it more attractive for power companies to build new
gas-fueled electricity generating units and to utilize existing units more. In
addition, slow expected growth in demand for electricity in some areas
has decreased the need for new generating units. Power companies may
weigh the costs of any needed investments compared with the benefits of
continuing to generate electricity at a particular unit. When the costs
outweigh the benefits, a power company may decide to retire a unit rather
than continue to operate the unit or install new pollution control
equipment.

The majority of coal produced in the United States is used domestically,
though exports represent a small but recently growing fraction of U.S.
coal production. In 2010, the United States exported 82 million tons of
coal, which accounted for 8 percent of total production. As shown in figure
3, coal exports to European and Asian markets represented 76 percent of
total U.S. coal exports in 2011. In 2011, total coal exports were up 31
percent compared with 2010, reaching 107 million tons, due largely to
rising exports to Europe and Asia. This was the highest level of exports
since 1991. In 2011, 35 percent of U.S. coal exports were of the types of
coal typically used to produce electricity, the remainder were of
metallurgical coals used in industrial processes, such as steelmaking.




13
  Specifically, the court issued an opinion that would strike down the regulation but has
not issued an order striking it down and likely will not issue such an order before deciding
whether the full court will rehear the case.




Page 8                                                                 GAO-13-72 Electricity
Figure 3: U.S. Coal Exports by Destination, 2001-2011




To better understand the potential future of the coal and electricity
industries, the federal government, private companies, and others use
models to project future industry conditions, including the future use of
coal. For example, EIA, IEA, and IHS Global Insight produce long-term
projections of electricity generation and generation from coal. 14 Because
the future depends on a multitude of factors that are difficult to predict,
EIA assesses various scenarios with different assumptions about future
conditions to better understand the range of potential future outcomes.
For example, EIA’s primary scenario, called its “reference” scenario, is a
business-as-usual estimate based on existing policies, known technology,


14
  See: EIA, Annual Energy Outlook 2012, DOE/EIA-0383 (Washington, D.C.: June 2012);
IEA, World Energy Outlook 2011 (Paris, France: 2011); and IHS Global Insight, U.S.
Energy Outlook, September 2011.




Page 9                                                          GAO-13-72 Electricity
                        and current technological and demographic trends. Additional scenarios
                        make different assumptions about fuel prices, economic conditions, and
                        government policies, among other things. Some of these scenarios are
                        especially relevant to the question of coal’s future, because they address
                        factors currently affecting the industry, such as the prices of coal and
                        natural gas—a fuel that competes with coal—and possible future policies
                        to address climate change. Appendix II presents further information about
                        the major assumptions behind these forecasts and scenarios.


                        The nation’s fleet of coal-fueled electricity generating units may have less
Retirements,            total generating capacity in the future, and the fleet may be capable of
Retrofits, and New      emitting lower levels of pollutants, according to available information.
                        These changes will be driven by industry plans to retire a significant
Construction May        number of units, install pollution control equipment on others, and build a
Result in a Smaller     few, new coal-fueled units that may emit lower levels of pollutants than
but Cleaner Coal-       the current fleet’s average emissions.

Fueled Electricity
Generating Fleet
Power Companies Are     According to forecasts we reviewed, power companies may retire a
Planning to Retire a    significant number of coal-fueled units in the future. In its reference
Significant Number of   scenario reflecting current policies, EIA projects that power companies
                        may retire 49,000 MW of coal-fueled capacity from 2011 through 2035
Older, Smaller, More    (i.e., 15 percent of coal-fueled capacity in 2011). IHS Global Insight
Polluting Units         projects that power companies may retire 76,476 MW of capacity from
                        2011 through 2035 (i.e., 24 percent of coal-fueled capacity in 2011).

                        Our statistical analysis of Ventyx data on announced retirement plans
                        indicates that, among other things, companies are planning to retire units
                        that are older, smaller, and more polluting. To assess the types of units
                        that may be retired, we analyzed data on current power company plans to
                        retire coal-fueled units. According to Ventyx data, power companies have
                        already reported plans to retire 174 coal-fueled units with a total 30,447
                        MW net summer capacity through 2020—which accounted for 10 percent
                        of coal-fueled capacity in 2011. 15 As we have previously reported, this


                        15
                          Data presented throughout this section refer to units with over 25 MW of net summer
                        capacity.




                        Page 10                                                             GAO-13-72 Electricity
would be significantly more retirements than have occurred in the past––
almost twice as much coal-fueled capacity as retired in the 22 years from
1990 through April 2012. 16 Based on our statistical analysis of these
plans, power companies are more likely to plan to retire units that are
older, smaller, and more polluting. (Appendix I provides further
information on our statistical analysis, which included examining several
other characteristics that may affect plans to retire units such as
(1) whether power companies are traditionally regulated or operate in
restructured markets and (2) a unit’s cost of generating electricity relative
to regional prices.)

•     Older. Power companies’ plans indicate they are more likely to retire
      older coal-fueled electricity generating units than newer units. Today’s
      fleet of operating coal-fueled units was built from 1943 through 2012,
      with the bulk of the capacity built in the 1970s and early 1980s. As
      shown in figure 4, units that power companies plan to retire are
      generally older, on average 54 years old compared with units with no
      retirement plans that average 39 years old. Some stakeholders we
      interviewed said that power companies are more likely to retire older
      units because these units may be reaching the end of their useful
      lives, can be less efficient at converting coal to electricity, and can be
      more expensive than newer units to retrofit, maintain, and operate.




16
    GAO-12-635.




Page 11                                                       GAO-13-72 Electricity
Figure 4: Capacity of Coal-Fueled Units by Year of First Commercial Operation and Planned Retirements




                                        Note: Data are for coal-fueled electricity generating units greater than 25 MW net summer capacity,
                                        and planned retirements represent plans through 2020. Net summer capacity is a unit’s capacity to
                                        generate electricity during the summer when electricity demand for many electricity systems and
                                        losses in efficiency are generally the highest. Net capacity excludes output used internally for plant
                                        operations.


                                        •    Smaller. The smaller a unit is, the more likely a power company is to
                                             be planning to retire it. (See fig. 5.) Size can be important when
                                             assessing the economics of additional investments needed to
                                             continue to operate coal-fueled units, as smaller units can be more
                                             expensive to retrofit, maintain, and operate on a per-MW basis. For
                                             example, some power companies may choose to install flue gas




                                        Page 12                                                                         GAO-13-72 Electricity
     desulfurization units—known as scrubbers—to control SO 2 and other
     air emissions. 17 According to an EPA report, a typical 100 MW coal-
     fueled unit could incur capital costs 66 to 74 percent higher per MW to
     install a scrubber than a 700 MW unit. 18 In addition, smaller
     generating units are generally less fuel-efficient than larger units.
     Units that are planned for retirement average 175 MW of capacity
     compared with units that are not planned for retirement that average
     351 MW of capacity. Figure 5 shows the number of coal-fueled units
     by capacity in MW.




17
  Scrubbers have been used commercially since the early 1970s and are the most
common technology for reducing SO2 emissions. They are capable of removing up to 99
percent of SO2 emissions and work by injecting a sorbent—a material used to absorb
molecules of a substance—into flue gas that reacts with pollutants to form a substance
that is collected and removed. Scrubbers can also reduce emissions of mercury and other
air pollutants. Another approach to reducing SO2 emissions from coal-fueled electricity
generating units is to switch from using coal with a higher sulfur content to coal with a
lower sulfur content or to blend higher-sulfur coal with lower-sulfur coal. However,
according to studies we reviewed, power companies may install scrubbers or other new
control equipment to meet the requirements of new regulations.
18
  Specifically, according to the EPA report, capital costs could range from $385,000 to
$470,000 per MW for a 700 MW unit, and from $641,000 to $817,000 per MW for a 100
MW unit. See: EPA, Documentation for EPA Base Case v.4.10 Using the Integrated
Planning Model, EPA#430R10010 (Washington, D.C.: August 2010).
(http://www.epa.gov/airmarkets/progsregs/epa-ipm/BaseCasev410.html)




Page 13                                                              GAO-13-72 Electricity
Figure 5: Number of Coal-Fueled Electricity Generating Units by Capacity Category




Note: Data are for coal-fueled electricity generating units greater than 25 MW net summer capacity,
and planned retirements represent plans through 2020. Net summer capacity is a unit’s capacity to
generate electricity during the summer when electricity demand for many electricity systems and
losses in efficiency are generally the highest. Net capacity excludes output used internally for plant
operations.

•    More polluting. Power companies' plans indicate they are more likely
     to retire units that emit SO 2 and NO x at higher rates. Units in which
     pollution control equipment has been installed may require relatively
     minimal additional investments to meet new environmental regulatory
     requirements. For example, for units without controls to limit mercury
     emissions, power companies may have to install scrubbers or other
     controls, whereas units with such controls may already be able to
     meet new emissions limits. Fewer of the units that are planned for



Page 14                                                                         GAO-13-72 Electricity
     retirement have pollution control equipment and, therefore, units
     planned for retirement emit air pollutants such as SO 2 and NO x at
     higher rates than the fleet overall. For example, 12 percent of the
     units planned for retirement have equipment installed to reduce SO 2
     emissions, while almost 60 percent of units with no retirement plans
     have such equipment. As a result, units planned for retirement emitted
     an average of over twice as much SO 2 per unit of energy used in
     2011 as units that are not planned for retirement—1.5 pounds of SO 2
     for units planned for retirement compared with 0.6 pounds of SO 2 per
     million British thermal units (Btu) of energy used for units not planned
     for retirement (see fig. 6). 19 Similarly, units planned for retirement
     emitted on average about 60 percent more NO x and 1 percent more
     CO 2 than units not planned for retirement.




19
  A Btu is a measure of energy that is the heat required to raise the temperature of 1
pound of water by 1 degree Fahrenheit.




Page 15                                                               GAO-13-72 Electricity
Figure 6: Number of Coal-Fueled Electricity Generating Units by 2011 SO 2
Emissions Rate




Note: A British thermal unit (Btu) is a measure of energy and equals the heat required to raise the
temperature of 1 pound of water by 1 degree Fahrenheit. Data are for coal-fueled electricity
generating units greater than 25 MW net summer capacity, and planned retirements represent plans
through 2020. Net summer capacity is a unit’s capacity to produce electricity during the summer when
electricity demand for many electricity systems and losses in efficiency are generally the highest. Net
capacity excludes output used internally for plant operations.


Based on our statistical analysis of the characteristics associated with
current retirement plans, we examined units owned by companies that
have not announced any retirements to estimate the number of additional




Page 16                                                                        GAO-13-72 Electricity
                             units and associated generating capacity that power companies may
                             consider retiring. 20 Our analysis is subject to some uncertainty, and we
                             therefore identified a range of units that power companies may consider
                             retiring. 21 In addition to the 174 coal-fueled units with 30,447 MW of
                             capacity (10 percent of total coal-fueled capacity in 2011) that are
                             currently planned for retirement through 2020, our analysis predicts an
                             additional 90 to138 coal-fueled units with 15,700 MW to 25,200 MW of
                             capacity (5 to 8 percent of total) that companies may consider retiring.
                             The capacity of units already planned for retirement (10 percent of total
                             capacity), together with this additional capacity (5 to 8 percent of total
                             capacity), suggests that 15 to 18 percent of total coal-fueled generating
                             capacity could retire––an amount generally consistent with other
                             forecasts we reviewed.


Many Units May Be            As we reported in July 2012, power companies may retrofit many coal-
Retrofitted with Pollution   fueled electricity generating units with new or upgraded pollution control
Control Equipment            equipment in response to new environmental regulatory requirements. 22
                             Though the requirements and deadlines these regulations may establish
                             for generating units are somewhat uncertain at this time, EPA’s analyses
                             and two other studies we reviewed in our prior report suggest that one-
                             third to three-quarters of all coal-fueled capacity could be retrofitted or
                             upgraded with some combination of pollution control equipment, including
                             scrubbers and other technologies to reduce SO2, mercury, and other
                             emissions. Once retrofitted with this pollution control equipment, the coal-
                             fueled fleet would be capable of generating electricity and emitting much
                             lower levels of pollution. For example, EPA projects that mercury
                             emissions from coal-fueled electricity generating units will decrease by 75
                             percent as a result of its new regulatory requirements. Nevertheless, even
                             the cleanest running coal-fueled unit may still be more polluting than
                             generating units that use other fuel sources. For example, the 10 least-


                             20
                               Specifically, we applied the results of our statistical analysis to units owned by power
                             companies that have not made retirement announcements, assuming that they may still
                             be assessing their options to identify units for retirement. We assume that companies that
                             have announced some retirements have effectively announced all the units they plan to
                             retire. See appendix I for additional information on our analysis.
                             21
                               Specifically, we identified the 95 percent confidence interval in that our analysis
                             suggests that there is a 95 percent probability that the actual number of units that may
                             retire is within this range.
                             22
                              See GAO-12-635.




                             Page 17                                                               GAO-13-72 Electricity
                            emitting coal-fueled units emitted over 10 times as much SO2 per unit of
                            energy input than the average combined cycle natural gas unit in 2011—
                            an average of 0.007 pounds of SO2 per million Btu compared with an
                            average of 0.0006 for combined cycle units. 23 Electricity generating units
                            that rely on solar and wind sources produce no such emissions.


Some New Generating         Available information suggests that industry intends to build some new
Units May Be Built and      coal-fueled electricity generating units. According to Ventyx data, power
Would Be Larger, Cleaner,   companies have plans to build 42 new coal-fueled electricity generating
                            units with 21,634 MW of capacity in various stages of planning or
and More Efficient Than     development (see fig. 7). However, as we have previously reported,
the Fleet Overall           developers generally have more planned projects than they complete. 24




                            23
                              Similarly, the 10 cleanest coal-fueled units emitted 24 percent more NOx and 79 percent
                            more CO2 per million Btu than the average combined cycle natural gas unit. Many natural
                            gas-fueled units built recently have used highly efficient combined-cycle technologies,
                            which rely on large gas turbines, also called combustion turbines, together with a steam
                            generator and a steam turbine to convert waste heat in the exhaust stream to electricity.
                            24
                             GAO, Restructured Electricity Markets: Three States' Experiences in Adding Generating
                            Capacity, GAO-02-427 (Washington, D.C.: May 24, 2002).




                            Page 18                                                             GAO-13-72 Electricity
Figure 7: Capacity of Planned Coal-Fueled Electricity Generating Units by Status, as
of July 26, 2012




Note: Data refer to net summer capacity—the generating unit’s capacity to generate electricity during
the summer when electricity demand for many electricity systems and losses in efficiency are
generally the highest. Net capacity excludes output used internally for plant operations.


The total capacity of coal-fueled electricity generating units in the United
States may decline in the future as less capacity is expected to be built
than is expected to retire. As discussed, 49,000 to 76,476 MW of coal-
fueled capacity is projected to retire by 2035 according to EIA and IHS
Global Insight, respectively, and they project that 11,000 MW and 22,134
MW of new coal-fueled capacity will be added by 2035, respectively. EIA
officials told us that new coal-fueled capacity in their projections is
primarily expected in the next few years and represents units that are
already planned or under construction. As less capacity is expected to be
built than is expected to retire, total coal-fueled capacity is expected to
decline in the future, as shown in figure 8. Coal's share of total electricity
generating capacity was about 30 percent in 2011. In EIA’s reference
scenario, coal's share of capacity declines to 25 percent in 2035 as


Page 19                                                                       GAO-13-72 Electricity
retiring coal-fueled units are not fully replaced, and as 176,100 MW of
other generating capacity is added in the future.

Figure 8: Actual 2011 and Projected 2035 Coal-Fueled Electricity Generating Capacity




Any coal-fueled units that are built in the future are likely to be larger, less
polluting, and more fuel-efficient than the average of the coal-fueled fleet
overall. Units that power companies are currently planning to build
average 515 MW of net summer capacity, and the operating fleet
averages 319 MW. 25 Additionally, new units must install technologies to
control emissions, and so are likely to emit lower levels of pollutants and
thus be cleaner than the fleet overall. For example, generating units built
after August 7, 1977, have had to obtain preconstruction permits that
establish air emissions limits and require the use of certain emissions



25
  As discussed, a number of generating units are expected to be retired in the future, and
these tend to be smaller units. Of the operating fleet, the average size of units planned for
retirement is 175 MW, and the average size of units without retirement plans is 351 MW.




Page 20                                                                GAO-13-72 Electricity
                             control technologies such as scrubbers to reduce emissions of SO2. 26 In
                             addition, some stakeholders we interviewed said that new coal-fueled
                             units were likely to incorporate designs that are able to convert fuel to
                             electricity more efficiently.


                             Coal is likely to continue to be a key fuel source for electricity generation
Coal Likely to Remain        in the United States, but its share as a source of electricity is expected to
a Key Fuel Source,           decline, and the future use of coal to generate electricity in the United
                             States may be affected by several key factors that include the price of
but Future Use May           natural gas and other competing fuels, environmental regulations, and the
Be Affected by Fuel          demand for electricity, among others. In addition, several stakeholders we
Prices, Environmental        interviewed said that coal may increasingly be exported for use in other
                             nations, though the extent of future exports is uncertain.
Regulations, and
Other Factors

Coal Likely to Continue to   According to stakeholders we interviewed and projections by EIA, IEA,
Be a Key Source of           and IHS Global Insight, coal is likely to continue to be a key fuel source
Electricity in the Future,   for U.S. electricity generation, but its share as a source of electricity is
                             generally expected to decline in the future. Some stakeholders told us
though Its Share Is          that, in the future, electricity generation from coal is likely to be displaced
Generally Expected to        by generation from other fuel sources, particularly natural gas, but they
Decline in the United        still expect coal’s contribution to electricity generation to be significant.
States                       Furthermore, in its reference scenario, EIA estimates that coal will
                             represent 38 percent of U.S. electricity generation in 2035 under current
                             policies––down from 42 percent in 2011. 27 As shown in figure 9, the total
                             amount of electricity generated using coal is expected to remain relatively
                             constant over this same period under EIA’s reference scenario, growing
                             by 0.1 percent annually. However, the amount of electricity generated
                             using some other fuel sources, for example, natural gas and renewables,
                             will increase at higher annual rates—1.4 percent and 2.3 percent
                             respectively—diminishing coal’s total share of electricity generation.



                             26
                               The New Source Review provisions of the Clean Air Act establish this permitting
                             process. See GAO-12-545R.
                             27
                               As mentioned, coal's share of total electricity generating capacity was about 30 percent
                             in 2011 and is expected to decline, according to EIA’s reference scenario, to 25 percent in
                             2035 as retiring coal-fueled generating units are replaced with few new coal-fueled units.




                             Page 21                                                               GAO-13-72 Electricity
Figure 9: EIA’s Reference Scenario Projections of Electricity Generation by Fuel




Note: Data from 2009 and 2010 represent historical data. Data from 2011 and after represent EIA
estimates. Renewable sources include conventional hydroelectric, geothermal, wood, wood waste,
certain municipal wastes, landfill gas, other biomass, solar, and wind power. Other includes pumped
storage, certain municipal wastes, refinery gas, still gas, batteries, chemicals, hydrogen, pitch,
purchased steam, sulfur, and miscellaneous technologies.


IEA, in its current policies scenario, which considers policies enacted by
mid-2011, projects that coal’s share of electricity generation will increase
slightly to 43 percent in 2035. IHS Global Insight, which assumes some
changes in current U.S. policies in its analysis, projects that coal’s share
of electricity generation will decline to 26 percent in 2035.

Power companies are expected to retire a significant number of coal-
fueled generating units in the future, but these retirements may have


Page 22                                                                      GAO-13-72 Electricity
more of an impact on coal-fueled capacity than on electricity generation
from coal. As discussed, our statistical analysis suggests that 15 to 18
percent of total coal-fueled generating capacity could retire. Units that
may retire did not run as intensively as coal-fueled units overall, and we
estimate they may account for 13 to 16 percent of the annual average
electricity generation from coal. 28 (See app. I for additional information on
our statistical analysis.)

The changes in coal use may also result in shifts between major coal-
producing areas in the United States. As shown in figure 10, EIA identifies
three broad coal-producing regions in the United States: Appalachia, the
Interior region spanning coal-producing areas in central states to Texas,
and the Western region covering coal-producing areas in western states
and Alaska. In EIA’s reference scenario, coal production from Appalachia
declines, and production from the Western and Interior regions increases
through 2035. 29 According to EIA, in 2010, 31 percent of coal was
produced in Appalachia, 14 percent was produced in the Interior region of
the United States, and 55 percent was produced in the West. As shown in
figure 10, EIA’s reference scenario projects that these production figures
will change by 2035, with 24 percent of coal produced in Appalachia, 16
percent produced in the Interior region, and 60 percent produced in the
Western region.




28
 Generation is based on annual average generation 2007-2011.
29
  Of the three estimates we reviewed, EIA was the only one that provided information on
the location of coal production in the United States.




Page 23                                                             GAO-13-72 Electricity
Figure 10: Actual 2010 and EIA’s Reference Scenario Projected 2035 Coal Production by Region




                                        Within Appalachia, EIA expects declines to come from the central region,
                                        which includes southern West Virginia, Virginia, eastern Kentucky, and
                                        northern Tennessee. This expected shift in coal production from the
                                        eastern United States to the West represents an industry trend ongoing
                                        since the early 1990s that is influenced by each region’s unique set of
                                        complex geological, mining, and transportation characteristics. For
                                        example, some stakeholders told us that demand for western coal has
                                        increased primarily because it is low in sulfur content, and the region’s coal
                                        reserves can be mined relatively inexpensively compared with Appalachian
                                        and Interior coal reserves, which are often more deeply underground and


                                        Page 24                                                     GAO-13-72 Electricity
                             costlier to access. Available information suggests that these benefits have
                             made western coal economically competitive with coal from the
                             Appalachian and Interior regions, despite western coal’s lower heating
                             value and higher cost to transport to some coal-fueled generating units.


Future Fuel Prices,          According to available information, the future use of coal to generate
Environmental                electricity in the United States may be determined by several key factors.
Regulations, and Other
Factors May Affect the Use
of Coal in the United
States
Prices for Natural Gas and   Available information suggests that the price of coal compared to the
Other Competing Fuels        prices of other fuel sources could influence how economically attractive it
                             is to use coal to generate electricity. This can affect how often existing
                             coal-fueled generating units are used, how many units are retired, and
                             how many new units are built. In general, the decision about whether to
                             operate a given generating unit is based on the costs of operating that
                             unit. Operating costs are driven, in part, by the cost of fuel sources and
                             how efficiently fuels are converted into electricity. In general, new natural
                             gas-fueled generating units are able to convert fuel into electricity more
                             efficiently than existing coal-fueled generating units, meaning they can
                             convert a unit of fuel energy into more electricity than less-efficient coal-
                             fueled units. Some natural gas-fueled units constructed in the last decade
                             can require less than 7,000,000 Btus of natural gas to generate one MWh
                             of electricity. In contrast, existing coal-fueled generating units require
                             around 10,000,000 Btus of coal to generate one MWh of electricity, and
                             187 coal-fueled units require over 12,000,000 Btus per MWh. Newer
                             designs of coal-fueled units exist that can operate at higher efficiencies,
                             but few have been built in the United States.

                             Generally, generating units with the lowest costs operate more often than
                             units with higher costs. If the price of natural gas falls relative to coal in a
                             particular region, depending on each unit’s efficiency, it may result in the
                             operating costs of some natural gas units dropping below the operating
                             costs of some coal units and, thus, natural gas units being operated more
                             often—and coal units less often—than before. We previously reported
                             that, in some areas of the country, it has become less economically




                             Page 25                                                      GAO-13-72 Electricity
                                        attractive to use coal to generate electricity, as the regional prices of coal
                                        have increased, the prices of natural gas have fallen, and the availability
                                        of natural gas has increased. 30 Multiple stakeholders told us that if natural
                                        gas prices remain low relative to coal prices, this trend could continue. As
                                        shown in figure 11, prices of coal and natural gas have varied historically,
                                        and EIA and IHS Global Insight project a range of potential future prices
                                        in their forecast scenarios.

Figure 11: Actual and Projected Coal and Natural Gas Prices




                                        Note: Shading is not indicative of projected prices between 2012 and 2035. As described, both fuel
                                        prices and efficiency will affect a generating unit’s operating costs and, thus, how often one unit
                                        operates compared with another. Many newer natural gas-fueled units are more efficient than coal-
                                        fueled units, and when the price of natural gas drops to a certain level relative to coal prices, it
                                        becomes less costly to operate these efficient natural gas units than coal units. Data for the high price
                                        scenarios were obtained from EIA’s “Low Estimated Ultimate Recovery” and “High Coal Cost”
                                        scenarios. These scenarios had the highest prices for natural gas and coal delivered to the electricity
                                        sector after the two greenhouse gas scenarios discussed later. Data for the low price scenarios were
                                        obtained from EIA’s “High Total Recoverable Resources” and “Low Coal Cost” scenarios. Data were
                                        converted to 2012 year dollars using the gross domestic product deflator based on the calendar year.
                                        a
                                         Average through June 2012.




                                        30
                                            GAO-12-635.




                                        Page 26                                                                         GAO-13-72 Electricity
                                EIA’s forecast suggests that future fuel prices may influence the extent to
                                which coal is used to generate electricity. As shown in Table 1, four EIA
                                scenarios project that the share of total electricity generated using coal
                                could vary from 30 to 42 percent in 2035 based on fuel prices. See
                                appendix II for further information about these scenarios.

                                Table 1: Results of EIA Alternate Fuel Price Scenarios

                                                                                                       Average annual
                                                                                Electricity          percent change in
                                                                                generated                     electricity                Share of total
                                                                                using coal            generated using                        electricity
                                                                                   (million            coal, 2010–2035                 generated using
                                 Scenario                                            MWh)                 (percentage)                             coal
                                 Actual, 2010                                           1,851               Not applicable                           45
                                 Actual, 2011                                           1,734               Not applicable                           42
                                 Reference Scenario, 2035                               1,897                           0.1 %                        38
                                 Scenario with High Coal
                                 Prices, 2035                                           1,577                           -0.6%                        32
                                 Scenario with Low Coal
                                 Prices, 2035                                           2,107                            0.5%                        42
                                 Scenario with High Natural
                                 Gas Prices, 2035                                       1,977                            0.3%                        40
                                 Scenario with Low Natural
                                 Gas Prices, 2035                                       1,542                           -0.7%                        30
                                Source: EIA, 2012 Annual Energy Outlook. Actual 2011 data are from EIA’s August 2012 Electric Power Monthly.

                                Note: Data for the high price scenarios were obtained from EIA’s “Low Estimated Ultimate Recovery”
                                and “High Coal Cost” scenarios. These scenarios had the highest prices for natural gas and coal
                                delivered to the electricity sector after the two greenhouse gas scenarios discussed later in this
                                report. Data for the low price scenarios were obtained from EIA’s “High Total Recoverable
                                Resources” and “Low Coal Cost” scenarios.



Current and Future              Available information indicates that existing and potential future
Environmental Regulations and   regulations may make it more expensive to generate electricity using
Renewable Energy Policies       coal, thus affecting coal’s future use. Some stakeholders we spoke with
                                indicated that current and proposed regulations addressing air pollution,
                                water pollution, and wastes from using coal could adversely affect coal in
                                the future by making it more expensive to generate electricity using




                                Page 27                                                                                            GAO-13-72 Electricity
coal. 31 Some stakeholders also said that coal would be adversely affected
by efforts to reduce greenhouse gas emissions from the electricity
industry, such as by a regulation EPA proposed in 2012—new source
performance standards for greenhouse gas emissions, which would
establish limits on the amount of CO2 that new generating units can
emit—as well as the potential for additional federal efforts to regulate
greenhouse gases. 32 Available information also indicates that the extent
to which these regulations adversely affect coal will depend, in part, on
the future economics and development of technologies to address CO2
emissions from coal-fueled units, such as technologies to capture and
store CO2. The development of effective and commercially viable CO2
controls for coal-fueled electricity generating units has received significant
attention, but some of these technologies are still in the research and
development phase, and most are not yet commercially viable. 33

Though it is unclear whether there will be additional future efforts to
reduce CO2 emissions, EIA assessed two scenarios examining


31
  Stakeholders provided various examples of current environmental and other regulations
with the potential to affect the coal industry in the future, including the National Emissions
Standards for Hazardous Air Pollutants from Coal and Oil Fired Electric Utility Steam
Generating Units, also known as the Mercury and Air Toxics Standards, which establishes
emissions limitations on mercury and other toxic pollutants. Stakeholders also discussed
the proposed Cooling Water Intake Structures at Existing Facilities and Phase I Facilities
regulation, which would establish requirements for water withdrawn and used for cooling
purposes that reflect the best technology available to minimize adverse environmental
impact and the proposed Disposal of Coal Combustion Residuals from Electric Utilities
regulation, which would govern the disposal of coal combustion residuals, such as coal
ash, in landfills or surface impoundments.
32
   EPA has taken actions to regulate greenhouse gas emissions from electricity generating
units. Specifically, since 2011, EPA regulations have required permits for greenhouse gas
emissions from certain new and existing units. In addition, under the terms of a settlement
agreement, EPA was required to propose and finalize new source performance standards
for greenhouse gas emissions from new and existing electricity generating units. In April
2012, EPA proposed standards for certain new electricity generating units and stated that
it would propose standards for existing units at an appropriate time.
33
  In 2008, we reported on the key economic, legal, regulatory, and technological barriers
impeding commercial-scale deployment of carbon capture and storage technology and
actions certain federal agencies are taking to overcome these barriers. GAO, Climate
Change: Federal Actions Will Greatly Affect the Viability of Carbon Capture and Storage
As a Key Mitigation Option, GAO-08-1080 (Washington D.C.: Sept. 30, 2008). In 2010,
we reported on the maturity, commercial viability, and implications of technologies to
reduce carbon dioxide from coal power plants. GAO, Coal Power Plants: Opportunities
Exist for DOE to Provide Better Information on the Maturity of Key Technologies to
Reduce Carbon Dioxide Emissions, GAO-10-675 (Washington, D.C.: June 16, 2010).




Page 28                                                                 GAO-13-72 Electricity
hypothetical future policies. One scenario has a hypothetical price on CO2
emissions starting at $15 per ton in 2013 that increases 5 percent per
year and that would reduce CO2 emissions from the electric power sector
by 46 percent below 2010 levels in 2035. Another scenario has an initial
price on CO2 emissions of $25 per ton that increases 5 percent per year
and would reduce CO2 emissions from the electric power sector by 76
percent below 2010 levels in 2035. EIA stated that these scenarios are
consistent with previously proposed legislation. EIA projected that, under
these two scenarios, coal’s share of total electricity generation could fall
to 16 and 4 percent in 2035, respectively. IEA also developed scenarios
that took potential additional efforts to address climate change into
account—one scenario that considers the United States’ international
commitments, even if nonbinding, and a second scenario that considers
an approach to energy use in the United States consistent with more
significant future steps to address climate change. Under these
scenarios, IEA estimates that 35 and 17 percent of U.S. electricity would
be generated by coal, respectively. 34

In addition, many states have policies in place requiring power companies
to increasingly rely on renewable sources for electricity, and similar
proposals have been introduced at the federal level. We have previously
reported that 30 states have laws or regulations requiring power
companies to increasingly rely on renewable sources for electricity. 35 At
the federal level, there have been several efforts to establish a national
renewable portfolio standard. For example, a Senate bill introduced in
March 2012 would require power companies to obtain a certain amount of
the electricity they sell from clean energy sources with zero or low carbon
generation, such as renewable energy, natural gas, and nuclear power.
An EIA analysis of this bill suggests that such a policy could increase




34
  Under the first scenario, IEA estimates a reduction of U.S. CO2 emissions from energy
of 12 percent by 2035 compared with emissions in 2009. The second scenario represents
a reduction of U.S. CO2 emissions from energy of more than half by 2035 compared with
emissions in 2009.
35
  These states are: Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois,
Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana,
Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oregon, Pennsylvania, Rhode Island, Texas, Washington, West Virginia, and Wisconsin.




Page 29                                                              GAO-13-72 Electricity
                         demand for renewables and other sources favored by these rules and
                         diminish demand for electricity from coal. 36

Demand for Electricity   Available information suggests that future electricity demand levels may
                         affect the use of coal to generate electricity. In general, if more electricity
                         is needed in the future, it becomes more likely that existing generating
                         units that are not already running at capacity—including coal units—will
                         be operated more often. Lower demand makes it more likely that the
                         opposite will happen. Demand levels also influence decisions about
                         whether to build new generating units, including coal-fueled units, with
                         high demand scenarios increasing the likelihood that new units will be
                         operated frequently enough to recover the capital costs associated with
                         their construction. According to EIA, electricity demand is affected by
                         factors including population growth and economic growth. In general,
                         electricity use increases as the economy grows, but improvements in
                         energy efficiency can offset some or all of the increases in electricity use
                         due to economic growth.

                         Electricity demand varies across EIA’s scenarios. In its high economic
                         growth scenario, in which future electricity demand is the highest, total
                         demand for electricity generated using coal grows at an annual rate of 0.3
                         percent from 2010 to 2035 to 2,004 million MWh in 2035, higher than the
                         1,897 million MWh estimate from EIA’s reference scenario. However, in
                         this scenario, EIA does not predict a significant change in coal’s share of
                         total electricity generation—37 percent compared with 38 percent in the
                         reference scenario. EIA’s scenario that assumes high use of energy
                         efficient technologies in the residential and commercial sectors estimates
                         the lowest future demand for electricity. In this scenario, electricity
                         generated from coal declines at an annual rate of 1.1 percent to 1,414
                         million MWh in 2035, and electricity generated from coal constitutes 34
                         percent of total electricity generation that year.

Other Factors            A variety of other factors may also affect the future of coal in the United
                         States. For example, some stakeholders told us that local opposition to
                         coal by environmental activists and other concerned citizens has and will
                         continue to adversely impact its future use. According to some other
                         stakeholders, coal’s future will also be influenced by the extent to which
                         technologies to reduce coal’s environmental impact become commercially



                         36
                          EIA, Analysis of the Clean Energy Standard Act of 2012 (Washington, D.C.: May 2012).




                         Page 30                                                          GAO-13-72 Electricity
                        available and economic. For example, technology to capture and store
                        carbon underground has the potential to address the adverse greenhouse
                        gas impacts of electricity generation using coal, which could increase
                        demand for coal.


Extent of Future Coal   Several stakeholders we interviewed said that U.S. coal may increasingly
Exports Is Uncertain    be exported for use in the electricity sector and for other purposes, but
                        the extent of future U.S. coal exports is uncertain. According to IEA, world
                        demand for coal grew rapidly from 2000 to 2010, and coal accounted for
                        nearly half the increase in global energy use over that period.
                        Additionally, according to IEA, world coal demand is strongly correlated
                        with global economic activity and will also be affected by world energy
                        and environmental regulations and the development and use of
                        technologies to reduce coal’s environmental impact.

                        Available information suggests that the future level of U.S. coal exports
                        will also depend on how competitive U.S. coal prices are internationally
                        and the extent to which the quality of coal available from the United
                        States is in demand. For example, metallurgical coal—coal used for such
                        activities as steel production—has historically constituted a significant
                        share of U.S. coal exports. Factors affecting the ability of other coal-
                        exporting countries to economically and reliably supply coal to
                        international customers include local freight rates, limits on the amount of
                        exports, and extreme weather events—all of which can influence the
                        relative price of U.S. coal and, thus, the amount of U.S. coal exported.

                        According to EIA’s reference scenario, coal exports are estimated to grow
                        1.8 percent annually from 2010 to 2035, reaching 129 million tons of coal
                        (11 percent of total U.S. production) in 2035. On the other hand, IHS
                        Global Insight projects that exports will fall 1 percent annually from 2010
                        to 2035, with 62.8 million tons of coal being exported in 2035 (7 percent
                        of total U.S. production).


                        We met with EIA officials to discuss an early draft of this report and
Agency Comments         incorporated technical suggestions where appropriate. We also provided
and Our Evaluation      a draft of this report to EIA and EPA for formal comment. EIA and EPA
                        did not provide written comments for inclusion in this report. EPA's Office
                        of Air and Radiation did provide technical comments and stated that the
                        report contained a very good description of many of the changes going on
                        in coal and electricity markets that are affecting the use of coal to
                        generate electricity. In its technical comments, EPA suggested that the


                        Page 31                                                    GAO-13-72 Electricity
draft’s emphasis on environmental regulations, particularly on the
Highlights page, was misleading and not consistent with the rest of the
report, which has a fuller discussion of many factors affecting the future
use of coal. EPA stated that market changes, which we discuss in the
report, would have significant impacts even in the absence of EPA's
regulations. We do not agree that the report was misleading, but given
that the Highlights page may be read without the benefit of the fuller
discussion found in the report, we moved language from the body of the
report to the Highlights page about other factors affecting the use of coal.
EPA provided other technical comments, which we incorporated where
appropriate.


As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the appropriate
congressional committees, the Administrators of the EIA and EPA, and
other interested parties. In addition, the report will be available at no
charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please
contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to this
report are listed in appendix III.

Sincerely yours,




Frank Rusco
Director, Natural Resources and Environment




Page 32                                                    GAO-13-72 Electricity
Appendix I: Analysis of Characteristics of
                           Appendix I: Analysis of Characteristics of
                           Coal-Fueled Generating Units That Power
                           Companies Plan to Retire


Coal-Fueled Generating Units That Power
Companies Plan to Retire
                           This appendix describes our statistical analysis of characteristics of coal-
                           fueled electricity generating units, such as age and size, that are likely to
                           affect power companies’ plans to retire certain units. We use this analysis
                           to estimate the number and generating capacity of other coal-fueled units
                           that power companies are likely to consider retiring.


                           To test the hypothesis that power companies are likely to retire older,
Methodology                smaller, and more polluting coal units by 2020, we used logistic
                           regression analysis. We analyzed industry data on all coal-fueled units
                           owned by power companies that have already announced plans to retire
                           one or more of these units. Using unit- and company-level data, primarily
                           from company-reported databases, we developed a model depicting the
                           relationship between companies’ announced plans to retire a unit and that
                           unit’s characteristics—age, size, emissions rates of sulfur dioxide (SO2)
                           and nitrogen oxides (NOx), and the regulatory status of the power
                           company that owns the unit, specifically whether the company is
                           traditionally regulated or operates in a restructured market. To estimate
                           the number and generating capacity of additional units likely to be retired,
                           we applied our model to a dataset consisting of coal-fueled units owned
                           by power companies that have not announced any retirements.


Model of Plans to Retire   In developing our model of power companies’ plans to retire coal-fueled
Coal-Fueled Generating     units, we relied on economic theory, as well as discussions with
Units                      stakeholders and our review of studies. Stakeholders included
                           representatives from power companies, a coal company, industry
                           associations, and nongovernmental organizations, and officials from
                           federal and state agencies. Stakeholders and studies mentioned the
                           following characteristics as likely unit-level determinants of power
                           companies’ plans to retire a coal-fueled unit or keep it in operation:

                           •   age;
                           •   generating capacity;
                           •   fuel efficiency (i.e., how efficiently a unit converts fuel to electricity)
                           •   operating cost and profitability;
                           •   pollution emission rates and whether a unit already has various types
                               of emissions control equipment; and
                           •   regulatory status.




                           Page 33                                                      GAO-13-72 Electricity
Appendix I: Analysis of Characteristics of
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Companies Plan to Retire




As a general matter, the larger, newer, more efficient, and less polluting a
generating unit is, the more likely it is that a power company may to want
to keep it in service and invest in retrofits that may be needed for it to
comply with environmental laws or regulations. For example, if a large,
new generating unit that a power company uses to meet a significant
portion of customer demand is not in compliance with environmental
regulations, retiring it would likely require replacing it with another unit of
similar size. Doing so may be very costly, and retrofitting it with the
requisite pollution control equipment may be a more economical choice.

It is also reasonable to expect regulatory status to have some impact on
power companies’ retirement plans because such plans could involve
significant investments. For companies that are traditionally regulated,
state public utility commissions review power companies’ plans for major
investments in pollution control equipment in the case of a retrofit, or in
replacement power generation capacity if it is needed after a unit is
retired. Decisions by power companies in restructured markets are not
subject to the same state public utility oversight. Furthermore, once state
public utility commissions approve a traditionally regulated company’s
plan to invest in major retrofits or replacement units, they allow it to
charge rates to recover its investment costs. Companies operating in
restructured markets have no such cost-recovery provisions, so their
investments in retrofits or replacement units may be riskier.

Our model does not include all the characteristics that stakeholders and
studies identified as possible characteristics that power companies
consider in deciding which coal-fueled units to retire. First, economic
theory and our analysis of data on coal-fueled units indicate that there are
interrelationships among some of these characteristics; for example,
newer, larger electric generating units tend to be more fuel efficient, and
this fuel efficiency contributes to lower operating costs. Hence, including
all characteristics would be redundant and weaken the statistical results.
Below, we discuss some specifications of the model with alternative sets
of variables. Second, there are likely other characteristics that may
influence power companies’ plans to retire generating units that we were
unable to include in our statistical analysis. We discuss limitations of our
model below.




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            Appendix I: Analysis of Characteristics of
            Coal-Fueled Generating Units That Power
            Companies Plan to Retire




Data Used   We used U.S. electricity data at the level of individual coal-fueled
            generating units that we obtained under contract from Ventyx, 1 a
            company that maintains a proprietary database containing consolidated
            energy and emissions data from the Energy Information Administration
            (EIA), 2 the Environmental Protection Agency (EPA), and other sources. In
            particular, we relied primarily on two datasets from Ventyx, “Generating
            Unit Capacity,” and “Unit Generation & Emissions – Annual,” from which
            we assembled our dataset of characteristics of operating coal-fueled
            generating units. These characteristics included some of the following:

            •   generating unit identification data, including name of power company
                owning the unit, location, and unit identification numbers;
            •   proposed retirement year;
            •   age;
            •   size, measured in megawatts (MW) of generating capacity;
            •   fuel efficiency;
            •   emissions rates of SO 2 , NO x , and carbon dioxide;
            •   types of installed control equipment or whether owners plan to install
                control equipment in the future;
            •   various cost measures, including generating unit marginal cost; and
            •   regulatory status: equals 1 if the power company that owns the unit
                was traditionally regulated or 0 if the company was operating in a
                restructured market. 3
            We also used regional day-ahead market prices from the
            IntercontinentalExchange (ICE) company, and spot market prices from
            the Federal Energy Regulatory Commission (FERC) to calculate an
            average wholesale market price for the regional markets associated with



            1
             Ventyx is an operating unit of the ABB Company.
            2
             EIA is a statistical agency within the Department of Energy that collects, analyzes, and
            disseminates independent information on energy issues.
            3
             In its datasets, Ventyx uses the term “unregulated” instead of the term we use,
            “restructured.” We use the term “restructured” because all generating units are subject to
            some type of government regulation, even if they are not traditionally regulated. A limited
            number of coal-fueled units in our sample are jointly owned by two or more companies
            with at least one owner being traditionally regulated and at least one other operating in a
            restructured market. In these cases, we designated the unit owner’s regulatory status
            according to the majority owner. In the case of two power companies owning six units,
            ownership was 50/50 between companies that were traditionally regulated and those
            operating in a restructured market. In this case, we decided to use the designation
            traditionally regulated for the power company’s regulatory status.




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          Appendix I: Analysis of Characteristics of
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          Companies Plan to Retire




          each unit in our dataset. 4 For each market region, we calculated a simple
          average of daily prices for the year 2011 from daily ICE price data. For
          some of the regions, however, there were no price data available from
          ICE, so we used the 2011 average spot market price from FERC. 5

          While our model does not include all the aforementioned characteristics,
          we used most of these characteristics in alternative specifications of the
          model and discuss two of these specifications below.

          Our complete dataset includes 959 coal-fueled units. This dataset
          includes only units that have a net summer generating capacity greater
          than 25 MW, making them subject to EPA emissions monitoring and
          reporting requirements. We excluded units that have not reported any
          electricity generation or SO2 or NOx emissions over the past 5 years. 6 Of
          the total 959 units, 482 units belong to power companies that have
          announced plans for retiring at least one coal-fueled unit.


          We used logistic regression (logit) analysis to analyze the characteristics
Results   that are affecting power companies’ retirement plans of coal-fueled
          electricity generation units. Regression analysis in general estimates the
          effect of a change in an independent variable on the outcome
          (dependent) variable, while holding other variables constant. Logit is a
          type of regression analysis for situations in which the dependent variable
          is a categorical variable—one that can take on a limited number of
          values—instead of a continuous, quantitative variable. In this case, the
          categorical variable is binary, which means that the choice is between
          only two outcomes.




          4
           ICE is a company that offers commodity trading services in energy, agriculture, and other
          sectors. ICE day-ahead electricity prices are publicly available on ICE’s website. While the
          Ventyx datasets to which we had access do not include regional wholesale electricity price
          data, they do indicate the ICE electricity market regions (referred as “hubs”) relevant to
          each of the units in the datasets that we used. The prices that FERC reports are based on
          data from Platt’s, a leading provider of commodity markets data.
          5
           We compared the average 2011 prices from the ICE data source and from FERC for the
          regions that both sources reported, and they were extremely close.
          6
           Net summer capacity is a unit’s capacity to produce electricity during the summer when
          electricity demand for many electricity systems and losses in efficiency are generally the
          highest. Net capacity excludes output used internally for plant operations.




          Page 36                                                               GAO-13-72 Electricity
Appendix I: Analysis of Characteristics of
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Companies Plan to Retire




We estimated the logit regression equation for the subgroup of 482 coal-
fueled generating units belonging to power companies that have
announced plans to retire at least one coal-fueled unit. The dependent
variable in our model is whether to retire or not retire a coal unit, and the
independent variables are the (1) age of unit; (2) net summer capacity as
a measure of unit size; (3) unit’s SO2 emissions rate in pounds (lb) of SO2
emissions per unit of heat input from the fuel used in the unit’s electricity
generation, measured using millions of British thermal units (Btu); (4)
unit’s NOx emissions rate in lb/million Btu; (5) whether the power
company that owns the unit is traditionally regulated or operates in a
restructured market.

Table 2 shows our resulting estimated equation and relevant statistics.

Table 2: Regression Results of Characteristics Associated with Planned Coal-
Fueled Unit Retirements–Dependent Variable Is the Probability of a Unit Retirement
Announcement
                                                                                                         a
    Variable                              Coefficient          Standard error            Significance
    Net summer capacity                      -0.00198                    0.0010                     5.9%
    Unit age                                  0.06647                    0.0201                     0.1%
    SO 2 emissions rate                       0.68053                    0.1550                     0.0%
    NO x emissions rate                       3.64861                    0.9168                     0.0%
    Regulatory status                        -1.56564                    0.3331                     0.0%
    Constant                                 -3.84944                    1.3276                     0.4%
Source: GAO analysis of Ventyx data

Note: Number of observations equals 482.
a
 Significance is measured by the probability that we would find these results if the true value of the
coefficient were zero. A lower significance level means that it is less likely that the observed pattern in
the data is the product of pure chance. As with any regression, the statistical significance depends on
the model being correctly specified.


These results generally confirm that smaller, older and more polluting
units are more likely candidates for retirement. In the table above, the
second column gives the estimated value of the coefficient, which
describes the relationship between the independent variables and the
likelihood of retirement. The remaining columns give the standard error
and the significance level. For example, the coefficient on net summer
capacity is negative, which means that an increase in capacity decreases
the probability that a unit is planned for retirement. Furthermore, as
shown in table 2, the estimated coefficient is significant at the 6 percent
level. An estimated coefficient is typically considered statistically
significant if the significance is less than 10 percent and very significant if


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Appendix I: Analysis of Characteristics of
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Companies Plan to Retire




it is less than 5 percent. Similarly, the coefficient on unit age is positive,
which means that an older unit is more likely to be retired, and this
coefficient estimate is significant at the 1 percent level. The coefficients
on SO2 and NOx emissions are also positive and significant at the 1
percent level.

Using the resulting logit regression equation, we analyzed “marginal
effects” of changes in each of the independent variables on plans to retire
an “average” unit owned by a power company in (1) a traditionally
regulated market and (2) a restructured market, and the “average unit,”
for this purpose, is one with median values for age, size/net summer
capacity, SO2, and NOx emissions rates, as shown in tables 3 and 4.

Table 3: Effect of 10% Change in a Variable Value on the Probability of an Average
Unit’s Planned Retirement When Owned by a Power Company in a Restructured
Marked

                                                                          Change in
                                         Median value     Value with   probability of
 Variable name                             of variable   10% change       retirement
 Net summer capacity (size of unit)               193           212              -2%
 Age of unit                                       43            47               7%
 Unit’s SO 2 emissions rate                      0.49           0.54              1%
 Unit’s NO x emissions rate                      0.20           0.22              2%
Source: GAO analysis of Ventyx data.




Table 4: Effect of 10% Change in a Variable Value on the Probability of an Average
Unit’s Planned Retirement When Owned by a Traditionally Regulated Power
Company

                                                                          Change in
                                         Median value     Value with   probability of
 Variable name                             of variable   10% change       retirement
 Net summer capacity (size of unit)               230           253              -1%
 Age of unit                                       43            47               4%
 Unit’s SO 2 emissions rate                      0.57           0.63              1%
 Unit’s NO x emissions rate                      0.23           0.25              1%
Source: GAO analysis of Ventyx data.



For example, a 10 percent increase in the capacity of an average unit
owned by a power company in a restructured market, from 193 to 212
MW, would decrease the probability of that unit’s retirement by about 2
percent, all other variables being held constant. For a unit owned by a



Page 38                                                          GAO-13-72 Electricity
                      Appendix I: Analysis of Characteristics of
                      Coal-Fueled Generating Units That Power
                      Companies Plan to Retire




                      power company in a traditionally regulated market, the same 10 percent
                      would decrease the probability of retirement by about 1 percent. Note that
                      the median values for units owned by power companies operating in
                      traditionally regulated and restructured markets are not the same and that
                      a 10 percent increase is therefore different. 7


                      The next step in our analysis was to use the resulting logit regression
Analysis Indicates    equation to estimate the number and generating capacity of other coal-
Units Power           fueled units that companies are likely to consider retiring among units
                      belonging to companies that have not, as of yet, announced plans to
Companies Likely to   retire coal-fueled units. We also estimated the generation associated with
Consider Retiring     these potential retirements in megawatt-hours (MWh). We assume that
                      some or all of these companies are likely to retire coal-fueled units, but
                      that they either have not decided which ones, or simply have not publicly
                      announced their plans. We further assume that these companies have or
                      will base their decisions on the same characteristics as the companies
                      that have already made announcements. Table 5 shows our analysis of
                      units that power companies may consider for retirement by 2020.




                      7
                       Note that marginal effects must be calculated for a given unit. We choose the median
                      values for each variable, but other values could have been chosen. Unlike a linear
                      regression analysis, the marginal effect of a logistic regression analysis depends on the
                      value of all of the variables. This is a general feature and prevents the predicted
                      probabilities from being greater than one or less than zero.




                      Page 39                                                               GAO-13-72 Electricity
Appendix I: Analysis of Characteristics of
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Companies Plan to Retire




Table 5: Coal-Fueled Units That Companies May Consider for Retirement by 2020

                                    Units owned by
                                    companies that       Units owned by
                                 have announced at       companies that
                                     least one coal- have announced no
                                         fueled unit     coal-fueled unit       Total coal-fueled
                                          retirement         retirements                    units
 All units
 Number                                            482                 477                     959
 Net summer
 capacity                                  158,000 MW        148,000 MW              306,000 MW
 Units planned for retirement or that may be considered for retirement
 Number                                            174           90 to 138             264 to 312
 Net summer                                               15,700 to 25,200       46,100 to 55,600
 capacity                                   30,400 MW                  MW                     MW
 Net summer
 capacity as percent
 of all units                                     19%           11 to 17%             15% to 18%
 Generation                                               91 to 151 million     241 to 301 million
                                        150 million MWh              MWh                    MWh
 Generation as a
 percent of all units                             16%           10 to 16%               13 to 16%
Source: GAO analysis of Ventyx data .

Note: We include only units from the Ventyx databases that have reported electricity generation and
SO 2 emissions greater than zero during any of the years 2008 through 2012, and with net summer
generating capacity greater than 25 MW. We rounded capacity numbers to the nearest 100 MW and
generation to the nearest million MWh. Generation is based on annual average generation 2007-
2011.


As shown in table 5, for the group of coal-fueled units whose owners have
not reported any coal-fueled unit retirements, our analysis indicates from
90 to 138 units may likely be considered for retirement by 2020. This
range represents the 95 percent confidence interval around our point
estimate of 114 units. In other words, our model indicates that there is a
95 percent probability that the actual number of units that will retire is
within this range. These 90 to 138 units account for 15,700 to 25,200 MW
of capacity and 91 to 151 million MWh of electricity generation. If we add
these units to those that power companies have announced for
retirement, the total of coal-fueled retirements could range from 264 to
312 units by 2020, amounting to from 46,100 to 55,600 MW of capacity




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                    Appendix I: Analysis of Characteristics of
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                    Companies Plan to Retire




                    and average annual generation of 241 to 301 million MWh. 8 In
                    percentage terms, this would be 15 to 18 percent of the capacity and 13
                    to 16 percent of the generation of the current coal-fueled fleet of
                    generating units.


                    This section discusses the limitations of our model and alternative model
Limitations and     specifications that we tested.
Alternative Model
Specifications

Limitations         A major limitation of our model is that we used a nonrandom sample of
                    the entire population of coal-fueled units to estimate the relationship
                    between the characteristics of coal-fueled units and power companies’
                    plans to retire a unit. Our sample consisted of companies that announced
                    plans to retire at least one unit but was not a random sample. It is
                    possible that the companies that announced planned retirements and
                    those that did not so announce differ in systematic ways that we do not
                    observe from the data. 9 Such differences could result in omitted variable
                    bias.

                    Another important limitation of our model is that we did not include all
                    factors that contribute to power companies’ decision to retire coal-fueled
                    units. Apart from unit-level considerations, major factors that affect a
                    power company’s decision to retire a coal-fueled unit include fuel costs,
                    environmental regulations, regional and local market considerations
                    (e.g., expected future electricity demand and supply conditions, and
                    transmission constraints), and technological developments in electricity
                    generation and pollution control. For example, we did not take into
                    account that planned unit retirements might make otherwise marginal



                    8
                     We base our estimate of the expected loss of generation due to these retirements on
                    generation from units in our dataset for the years 2007-2011.
                    9
                     In addition, we could not distinguish between two types of power companies with no
                    announced planned retirements: (1) on the one hand, companies that may actually have
                    some plans to retire some of their coal-fueled units but, for one reason or another, have
                    no incentive to make their plans public and (2) companies that have actually decided not
                    to retire any of their units. In our dataset, both companies would be labeled
                    “unannounced.”




                    Page 41                                                              GAO-13-72 Electricity
                             Appendix I: Analysis of Characteristics of
                             Coal-Fueled Generating Units That Power
                             Companies Plan to Retire




                             units in some regions more valuable and less likely to retire. Companies
                             that own coal-fueled units may have different expectations regarding
                             these factors, which we did not consider in our analysis. 10 Effectively,
                             therefore, we assumed that power companies have very similar
                             expectations regarding these factors.

                             These above limitations could mean that our model does not accurately
                             or fully reflect power companies’ unit retirement decisions. This would
                             also mean that our estimates of how many unannounced units will retire
                             may be inaccurate. For most of the limitations, the direction of bias in our
                             model—the extent to which it may over- or under-estimate the likelihood
                             of a unit retiring—is unclear. Addressing these limitations was beyond the
                             scope of our review.

Alternative Specifications   To check the robustness of our model, we tested different specifications;
                             that is, we ran logistic regressions using different sets of independent
                             variables. For example, we tried specifications that included a measure of
                             a unit’s fuel efficiency, and another representing whether a unit is
                             planning to install pollution control equipment. We also tried a version
                             with unit average capacity factors in recent years, a measure of how
                             intensively a unit is utilized. Based on our results, none of these variables
                             significantly improved the model. Below, we discuss two other alternative
                             specifications in more detail.

                             In one alternative specification, we used clustered standard errors. Our
                             model assumes that each individual coal-fueled unit has a unique error
                             term that is independent of every other unit. In this specification, we allow
                             for the possibility that units owned by the same power companies may be
                             related in unobserved ways and, therefore, the error terms may be
                             correlated. As shown in table 6, the estimated coefficients in this
                             alternative specification are very similar to our model, but the standard
                             errors are generally bigger, and the estimated coefficients are generally
                             less statistically significant. This is especially true for net summer
                             capacity, which is no longer statistically significant at the commonly
                             accepted 10 percent level.




                             10
                               To do so would have required an extensive survey of power companies, which was
                             beyond the scope of our review.




                             Page 42                                                          GAO-13-72 Electricity
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Table 6: Regression Results of Characteristics Associated with Planned Coal-
Fueled Unit Retirements Using Clustered Standard Errors
                                                                                                         a
    Variable                            Coefficient           Standard error             Significance
    Net summer capacity                     -0.00198                     0.0014                   14.9%
    Unit age                                 0.06647                     0.0269                     1.3%
    SO 2 emissions rate                      0.68053                     0.2041                     0.1%
    NO x emissions rate                      3.64861                     1.1659                     0.2%
    Regulatory status                       -1.56564                     0.3039                     0.0%
    Constant                                -3.84944                     1.7726                     3.0%
Source: GAO analysis of Ventyx data.

Note: Number of observations equals 482.
a
 Significance is measured by the probability that we would find these results if the true value of the
coefficient were zero. A lower significance level means that it is less likely that the observed pattern in
the data is the product of pure chance. As with any regression, the statistical significance depends on
the model being correctly specified.


In a second alternative specification, we used adjusted marginal cost as a
proxy for the profitability of a unit. Based on economic logic and what we
heard from stakeholders, we expected some indicator of the cost and
profitability of electricity generation to contribute significantly to the
retirement decision. Table 7 shows a version with marginal cost adjusted
for regional wholesale prices and an interaction term with marginal cost
and regulatory status. We adjusted marginal cost by dividing it by the
regional wholesale price to account for the fact that units are more or less
valuable depending on regional wholesale electricity prices. The
interaction term allows us to effectively estimate two coefficients for
adjusted marginal cost, one for power companies in traditionally regulated
markets, and one for power companies in restructured markets. We
included an interaction term to account for the possibility that power
companies in traditionally regulated and restructured markets view costs
differently. 11 Indeed, as shown in table 7, the estimated adjusted marginal
cost coefficients differ—for power companies in restructured markets, the
adjusted marginal cost coefficient is about 5.8, while the estimated
coefficient for power companies in traditionally regulated markets is the
adjusted marginal cost coefficient plus the interaction term (or 5.8 plus -


11
  State public utility commissions review the costs of traditionally regulated power
companies and also review the prices that they charge for the electricity that they sell to
their customers, while companies that operate under restructured markets are more
directly exposed to market conditions governing costs and prices.




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8.2 = -2.4). These results suggest that while higher adjusted marginal
costs increase the probability of retirement of units owned by power
companies in restructured markets, they decrease the probability for units
owned by traditionally regulated power companies. The interpretation of
these results is unclear.

Table 7: Regression Results of Characteristics Associated with Planned Coal-
Fueled Unit Retirements Including Adjusted Marginal Cost and Interaction Term
                                                                                                         a
    Variable                                          Coefficient   Standard error       Significance
    Net summer capacity                                  -0.0019            0.0011                  8.9%
    Unit age                                              0.0667            0.0204                  0.1%
    SO 2 emissions rate                                   0.8113            0.1763                  0.0%
    NO x emissions rate                                   3.4200            0.9328                  0.0%
    Adjusted marginal cost                                5.8028            2.6250                  2.7%
    Cost and regulation interaction                      -8.1719            2.7112                  0.3%
    Regulatory status                                     3.1255            1.4965                  3.7%
    Constant                                             -6.9313            2.0123                  0.1%
Source: GAO analysis of Ventyx, FERC, and ICE data.

Note: Number of observations equals 482.
a
 Significance is measured by the probability that we would find these results if the true value of the
coefficient were zero. A lower significance level means that it is less likely that the observed pattern in
the data is the product of pure chance. As with any regression, the statistical significance depends on
the model being correctly specified.




Regarding the costs of producing electricity, our findings differed for
companies in restructured markets and companies that are traditionally
regulated. Specifically, our results suggest that companies in restructured
markets are more likely to retire units with higher adjusted marginal costs.
In contrast, our results suggest that companies operating in regulated
markets are less likely to retire units with higher adjusted marginal costs.
A number of characteristics, not considered in our model, could provide
alternative explanations for this difference. For example, it could be the
case that the units in our sample have unique characteristics. One such
potential case could be that units owned by power companies in
traditionally regulated markets may be located in areas where concerns
about the reliability of the electricity system are significant, and the costs
of retrofitting an older generating unit are less costly than retiring it.
Similarly, it could be that our sample contains a number of units located in
areas with lower cost alternative suppliers or where prices are low—
diminishing the attractiveness of even a relatively low-cost unit.



Page 44                                                                           GAO-13-72 Electricity
Appendix II: Description of Selected
                                          Appendix II: Description of Selected Scenarios
                                          and Forecasts



Scenarios and Forecasts

                                          Table 8 describes key scenarios and assumptions in the EIA, IEA, and
                                          IHS Global Insight forecasts discussed in this report.

Table 8: Description of EIA, IHS Global Insight, and IEA Scenarios and Forecasts

                                                                                                          Average annual change
                                                                                                           in electricity produced
                                                                                                             from coal, 2010-2035
                                                                                                                                 a
Scenario                            Description                                                                      (percentage)
EIA Annual Energy Outlook
Reference                           A business-as-usual trend estimate, given known technology and
                                    technological and demographic trends. Baseline economic growth
                                    (2.5 percent per year from 2010 through 2035), oil price, and
                                    technology assumptions.                                                                  0.1%
Low Coal Price                      Regional productivity growth rates for coal mining are
                                    approximately 2.8 percent per year higher than in the Reference
                                    scenario, and coal mining wages, mine equipment, and coal
                                    transportation rates in 2035 are between 21 and 25 percent lower
                                    than in the Reference scenario. EIA refers to this as its “Low Coal
                                    Cost” scenario.                                                                          0.5%
 High Coal Price                    Regional productivity growth rates for coal mining are
                                    approximately 2.8 percent per year lower than in the Reference
                                    scenario, and coal mining wages, mine equipment, and coal
                                    transportation rates in 2035 are between 25 and 27 percent
                                    higher than in the Reference scenario. EIA refers to this as its
                                    “High Coal Cost” scenario.                                                              -0.6%
Low Gas Price                       Assumes the well spacing for all tight oil and shale gas plays is 8
                                    wells per square mile (i.e., each well has an average drainage
                                    area of 80 acres) and assumes 50 percent higher recovery for
                                    tight oil and shale gas wells than in the Reference scenario. Also
                                    assumes higher reserves of tight oil and shale gas that are more
                                    than twice the assumptions in the Reference scenario. EIA refers
                                    to this as its “High Technically Recoverable Resources” scenario.                        -.7%
High Gas Price                      Assumes 50 percent lower recovery per tight oil and shale gas
                                    well than in the Reference scenario, increasing the per-unit cost
                                    of developing the resource. Also assumes about 50 percent lower
                                    reserves of tight oil and shale gas than in the Reference scenario.
                                    EIA refers to this as its “Low Estimated Ultimate Recovery”
                                    scenario.                                                                                0.3%
$15 Greenhouse Gas Price            Applies a price for carbon dioxide emissions throughout the
                                    economy, starting at $15 per metric ton in 2013 and rising by 5
                                    percent per year through 2035. In this scenario, carbon dioxide
                                    emissions from the electric power sector in 2035 would be
                                    reduced by 46 percent from 2010 levels.                                                 -3.5%
$25 Greenhouse Gas Price            Applies a price for carbon dioxide emissions throughout the
                                    economy, starting at $25 per metric ton in 2013 and rising by 5
                                    percent per year through 2035. In this scenario, carbon dioxide
                                    emissions from the electric power sector in 2035 would be
                                    reduced by 76 percent from 2010 levels.                                                 -9.2%




                                          Page 45                                                              GAO-13-72 Electricity
                                     Appendix II: Description of Selected Scenarios
                                     and Forecasts




                                                                                                       Average annual change
                                                                                                        in electricity produced
                                                                                                          from coal, 2010-2035
                                                                                                                              a
Scenario                       Description                                                                        (percentage)
High Economic Growth           Assumes higher growth rate of gross domestic product—an                                    0.3%
                               average annual rate of 3 percent from 2010 to 2035, compared
                               with 2.5 percent in the reference case.
High Use of Energy Efficient   Assumes all future residential and commercial equipment                                   -1.1%
Technologies                   purchases represent the most efficient models available in a
                               particular year for each fuel, regardless of cost. EIA refers to this
                               as its “Integrated Best Available Demand Technology” scenario.
IHS Global Insight
                               A long-term forecast based on a single set of assumptions about                           -0.5%
                               future energy policies, fuel prices, and other factors. For example,
                               IHS Global Insight assumes that a federal greenhouse gas cap-
                               and-trade program is implemented for the power sector in 2021
                               but with a limit on how high carbon prices could rise; a federal
                               clean energy standard is enacted to promote use of electricity
                               generated using renewables, nuclear energy, and coal
                               technologies capable of carbon-capture; and improvements are
                               made in the energy efficiency of appliances, equipment and
                               building standards.
                           a
IEA World Energy Outlook
Current policies               A baseline scenario based on government policies and measures                              0.8%
                               enacted by mid-2011.
New policies                   Assumes some future implementation of international policy                                -0.1%
                               commitments and plans related to climate change, pollution, and
                               other energy-related challenges. This includes, for example,
                               implementation of EPA regulations to reduce mercury and other
                               pollutants in the power sector.
Scenario 3                     Assumes future changes consistent with a 17 percent reduction in                          -3.0%
                               U.S. carbon dioxide emissions in 2020 compared with 2005, as
                               well as the implementation of a price on carbon dioxide after 2020
                               in the United States. This scenario represents a reduction of U.S.
                               carbon dioxide emissions from energy of more than half by 2035
                               compared with emissions in 2009.
                                     Sources: EIA, IHS Global Insight, IEA.
                                     a
                                      IEA data reflect change from 2009 to 2035.




                                     Page 46                                                                GAO-13-72 Electricity
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Frank Rusco, (202) 512-3841, ruscof@gao.gov
GAO Contact
                  In addition to the contact named above, Jon Ludwigson (Assistant
Staff             Director), Mike Armes, Patrick Dudley, Philip Farah, Quindi Franco, Cindy
Acknowledgments   Gilbert, Paige Gilbreath, Alison O’Neill, Kendal Robinson, Jeanette
                  Soares, and Kiki Theodoropolous made key contributions to this report.




                  Page 47                                                 GAO-13-72 Electricity
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             GAO-12-545R. Washington, D.C.: April 18, 2012.

             Coal Power Plants: Opportunities Exist for DOE to Provide Better
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(361411)
             Page 48                                                 GAO-13-72 Electricity
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