Massachusetts-based The Brattle Group said Thursday that it estimates potential increases in energy prices tied only to withdrawn units from the power supply in the nation will be about $US3 to $4 per megawatt-hour for on-peak hours and $1 to $2/MWh for off-peak hours.
Should the US see an increase in gas prices in a ripple effect from replacing some of the retiring coal plants, the impact may total as much as $9 to $11/MWh on-peak and $5 to $6/MWh during off-peak hours.
The group acknowledged that many studies have already projected likely numbers of coal plant retirements and retrofits from increasingly stringent federal regulations, as well as the implications of these supply shifts on wholesale energy and capacity prices. However, how related market feedback effects plant economics is a topic rarely investigated.
“It is likely that reduced supply for electricity generation, increased operating costs, and changes in fuel demands will drive up market prices,” the group said.
“It is also likely that, because of the uncertainty and time frames for these retirement decisions, not all of these impacts are currently reflected in public forecasts or market forward prices.”
Brattle said that it used a case study for the eastern PJM region to determine the specifics of the potential impact.
Co-author and Brattle principal Frank Graves said that some of the feedback effects may already be partly reflected in forward prices; however, this is probably without strong certainty because we do not yet know the environmental policies that we will end up with or market participants' responses to them.
“Moreover, retirement versus retrofit studies often evaluate whether the plants at risk are profitable at expected market prices, without considering that if enough plants retire, the market prices themselves may increase,” he said.
“Thus, there may be a few dollars [per megawatt-hour] of risk in forward prices that could move either way depending on pending rule resolutions and market responses.”
The Brattle Group’s study also included a qualitative assessment of impacts on capacity prices.
“The first effect would be to reduce the total supply of capacity in that region until replacement resources come online, hence reducing the reserve margins,” the authors said.
“This would tend to increase the capacity prices in the short to medium term.”
Additionally, the group said, another effect would be to decrease net CONE in capacity markets resulting from higher energy prices, which would decrease the long-run equilibrium capacity price until the impacts of the retirements disappear.
“[O]ther waves of entry or exit, such as large commitments to renewables, or early retirements of nuclear units, could trigger similar feedback effects,” the report said.
