Does Texas’ biggest electricity generator, Dallas-based Luminant, just have one hell of a poker face, or should we not read too much into Friday’s announcement that it will idle two units at its Monticello plant for six months? If you’ll recall, the company threatened to idle the units last summer, a time when record demand almost forced rolling blackouts. It claimed that an EPA rule designed to reduce the amount of harmful air pollution wafting across state lines was going to force the company to remove 1,200 megawatts from the grid, enough to power more than a million homes.
Texas politicos were quick to pile onto the agency’s “job-killing” regulations, which they said threatened the very integrity of the grid. “As expected, the only results of this rule will be putting Texans out of work and creating hardships for them and their families, while putting the reliability of Texas’ grid in jeopardy,” Gov. Rick Perry scolded from the presidential campaign trail.
“The rule will impose great costs on coal-fired power plants, causing some to shut down or curtail operations, threatening the state’s electrical capacity reserve margins needed to avoid power disruptions during times of peak demand,” Texas Commission on Environmental Quality director Bryan Shaw warned. “Such a scenario could lead to blackouts, which create serious health risks for Texans dependent on reliable energy.”
To hear them tell it, Texas was given a brief reprieve when a federal appeals court stayed the rule pending oral arguments. And when it tossed the Cross-State Air Pollution Rule altogether last month, the court’s decision was heralded as a decisive coup for Luminant and Texas electric reliability.
“EPA’s illegal micro-managing of state air-quality plans was so specific that immediately after the rule-making it was clear that coal-powered energy production at Texas-based plants operated by Luminant, a big utility, would have to be cut,” a Wall Street Journaleditorial opined. “Tuesday’s ruling means Luminant will be able to keep 1,300 megawatts of power online in Texas, which needs more electricity because unlike other parts of the U.S. in the Obama era it is growing.”
But no sooner had Texas Attorney General Greg Abbott crowed over his “defeat” of the “EPA overlords” than Luminant announced it would idle those two Monticello units anyway. Awkward. For between six or seven months, starting in December, they will sit dormant. Luminant spokesperson Allan Koenig blames low power prices. Monticello has been running below capacity as it is, he says. They’ll be back online in time for next summer’s heat wave. In the meantime, somehow, Luminant won’t lay anybody off.
What Koenig says about the power market is true: The price of electricity fell along with the price of natural gas back in 2008. Ever since then, their bottom line has gotten pinched, along with everyone else’s.
But Luminant is a special case, troubled by a unique predicament, causing some to wonder whether we can lay everything at the feet of the cruel market. The real problem came (as we examined in a March cover story, “Blackout Blues”) when private equity firm Kohlberg Kravis Roberts saddled the former TXU with tens of billions of dollars in debt. The bull electricity market KKR was betting on went bearish, and the newly reconstituted Energy Future Holdings’ already daunting mountain of debt became insurmountable. Analysts think the company’s preparing for an impending bankruptcy.
So, the coal-fired plants KKR expected Luminant to ride into profitability are now cheaper to shut down, particularly when seasonal electricity demand is low. That makes sense. It made sense, too, that as the generator navigated treacherous financial straits, costly pollution controls on aging, depreciating coal-fired units wouldn’t be the wisest investment. It’s one big expense they can’t currently afford. Nor can it afford to lose money by running a coal-fired plant.
It all causes one to wonder, though: Now that the threat of regulation has, albeit momentarily, passed, and the units it threatened to shut down because of clean air rules have gone dark anyway, what was the point of all that brinksmanship? Was Luminant playing a high-stakes game of chicken to ward off regulations by threatening to idle a plant it was going to idle regardless of the outcome? Luminant’s Koenig says the shut down is “in no way related” to last year’s regulatory standoff. “Federal regulation is very, very different from low power prices,” Koenig says. “We can’t control either, but we can respond to regulation and low power prices. The argument to me, it’s absolutely apples and oranges.”
Yet others in the industry say it’s all about the market. Always has been.
“These regulations will not kill coal,” John Rowe, until recently the leader of one of the country’s largest generators, told an audience at an American Enterprise Institute conference. “In fact, modeling done on the impacts of these rules shows that up to 50 percent of retirements are due to the current economics of the plant due to natural gas and coal prices.”
If fingers need to get pointed anywhere, point them in that direction, and at LBO architects that left the company all but incapable of navigating these choppy Texas waters.
We are wondering the same and believe market factors are impacting the coal industry more than the EPA and the current administration.