GenOn Energy (NYSE: GEN) has deactivated four coal units recently, including Niles Unit 2, and plans to deactivate more coal units in the coming years and to eventually retire those that have been deactivated.
In its Aug. 9 Form 10-Q filing, GenOn said that it deactivated the following coal-fired units at the referenced times: Niles Unit 2 (108 MW), Ohio, June 2012; and Elrama Units 1-3 (289 MW), Pennsylvania, mothballed June 2012, with a plan to retire in March 2014.
The company for some time has planned to shut coal units due to factors like age and new U.S. Environmental Protection Agency regulations, with the timing of those shutdowns changing as circumstances dictate. GenOn added in the Aug. 9 Form 10-Q that it currently expects to deactivate the following generating capacity, primarily coal-fired units, at the referenced times:
- Niles Unit 1 (109 MW), Ohio, October 2012;
- Elrama Unit 4 (171 MW), Pennsylvania, mothball October 2012 (plan to retire in March 2014);
- Portland (401 MW), Pennsylvania, January 2015;
- Avon Lake (732 MW), Ohio, April 2015;
- New Castle (330 MW), Pennsylvania, April 2015;
- Titus (243 MW), Pennsylvania, April 2015;
- Shawville (597 MW), Pennsylvania, place in long-term protective layup in April 2015;
- and Glen Gardner (160 MW), oil/gas-fired, New Jersey, May 2015.
GenOn said it filed with the Federal Energy Regulatory Commission in May for reliability must-run (RMR) arrangements for Niles Unit 1 and Elrama Unit 4 that are in effect from June 1 through Sept. 30, 2012. PJM determined that each of these units was needed past their planned deactivation date of June 1 to maintain transmission system reliability on the PJM system pending the completion of transmission upgrades. The RMR rate schedule sets forth the terms, conditions and cost-based rates under which GenOn will continue to operate the units for reliability purposes through Sept. 30, which is the date PJM indicated the units would no longer be needed for reliability. In July, the FERC accepted the RMR rate schedule subject to hearing and settlement procedures. In the settlement discussions ordered by the FERC or in any subsequent hearing, the RMR rate schedule may be modified.
“We expect industry retirements of coal-fired generating facilities to contribute to a tightening of supply and demand fundamentals and higher prices for the remaining generating facilities will more than offset reduced earnings from our unit deactivations,” GenOn noted, pointing out good news for it but bad news for energy consumers. “Consequently, we expect the resulting higher market prices to provide adequate returns on investment in environmental controls necessary to meet promulgated and anticipated requirements. Accordingly, we expect to invest approximately $603 million to $742 million over the next decade for selective catalytic reduction emissions controls and other major environmental controls to meet certain air and water quality requirements, which we expect to fund from existing sources of liquidity.”
In addition to the deactivations already outlined, GenOn plans to retire the coal-fired, 482-MW Potomac River facility in Alexandria, Va., in October 2012, and the Contra Costa facility (674-MW, gas-fired, located in California) in May 2013.
During 2011, GenOn entered into an agreement with the city of Alexandria, Va., to remove permanently from service the Potomac River facility. The agreement provides for the retirement of Potomac River in October. Since then both PJM and Potomac Electric Power (PEPCO), the local utility, have signed off on the move.
In other coal plant-related news:
- In January 2011, Stone & Webster, the EPC contractor for the scrubber projects at the Chalk Point, Dickerson and Morgantown plants in Maryland, filed three suits against GenOn in a Maryland federal court. Stone & Webster claimed that it had not been paid under the EPC agreements and sought liens against the properties, which the court granted. GenOn disputed the allegations and in February 2011 filed a related action in a federal court in New York. The proceedings in Maryland were stayed pending resolution of the New York case. In June, the two sides settled. GenOn agreed to pay Stone & Webster $107.1m in settlement of all outstanding invoices and amounts claimed to be owed by Stone & Webster in connection with the scrubber projects. Stone & Webster released the $165.6m in interlocutory liens that had been filed on the Chalk Point, Dickerson and Morgantown plants. As a result of the release of the liens, GenOn Mid-Atlantic released the $165.6m in reserved cash during June. In connection with the settlement agreement, GenOn dismissed the New York lawsuit.
- The New Jersey Department of Environmental Protection filed two administrative petitions with the U.S. Environmental Protection Agency in 2010 alleging that emissions from the coal-fired Portland plant in Pennsylvania were significantly contributing to nonattainment and/or interfering with the maintenance of certain NAAQS in New Jersey. In November 2011, the EPA published a final rule in response to one of the petitions that will require GenOn to reduce maximum allowable SO2 emissions from the two coal-fired units by about 60% starting in January 2013 and by about 80% starting in January 2015. In January, GenOn challenged the rule in the U.S. Court of Appeals for the Third Circuit. In 2013 and 2014, GenOn has several compliance options that include using lower sulfur coals (although this may at times reduce how much it is able to generate) or running just one unit at a time. Starting in January 2015, these units will be subject to more stringent rate limits, which will require either material capital expenditures and higher operating costs or the retirement of these two units.
- GenOn experienced a decrease in power generation volumes during the first six months of this year, as compared to the same period in 2011, particularly in its Eastern PJM and Western PJM/MISO segments. The decrease occurred primarily at the coal-fired facilities and was caused by a combination of unseasonably mild weather and contracting dark spreads resulting from decreasing natural gas prices. Consequently, GenOn has built up significant coal inventories at its generating facilities and, in the case of its Mid-Atlantic facilities, these inventories were at the maximum available storage capacity at these facilities. In April, GenOn issued notices of force majeure under the applicable coal contracts since it was impossible for it to take coal at these facilities. Recently it issued notices to the affected coal suppliers that the force majeure conditions have abated and the company expects to resume shipments. A number of the suppliers disputed the force majeure declarations. “In our communications with the affected coal suppliers, we have advised them that we expect to take all the coal for which we have contracted, at the contracted prices, as we are able to do so,” GenOn said.