Navigant Research Blog

As Rail Congestion Crimps Coal Supplies, Calls for Expansion Grow Louder

— October 27, 2014

Even as power plant operators are warning of coal supply shortages come winter, the U.S. government has predicted that congestion on the nation’s railways is likely to get much worse in coming years.

Increased freight traffic traveling by rail – particularly crude oil from the Great Plains and grain from a bumper crop this year – has led to significant bottlenecks across the railway network, the Government Accountability Office (GAO) said in a report issued in September.  Rail traffic has reached the levels last seen in 2007, before the global recession, and “recent trends in freight flows, if they continue as expected, may exacerbate congestion issues in communities, particularly along certain corridors,” the GAO concluded.

Sounding a more dire warning, Hunter Harrison, the CEO of Canadian Pacific, said during a recent analyst briefing that the entire North American railway system is headed toward a cliff.  “We’re quickly approaching a time where none of this works,” Harrison said, according to The Financial Times.  “We cannot continue to go down the road that we’re going down and be successful and not have gridlock beyond anything we’ve experienced before.”

On to Chicago, Slowly

Like a slow train spotted in the distance, this fall’s tie-up of train traffic has been anticipated for years.  The domestic oil & gas boom, centered in the Bakken formation in North Dakota, has had ripple effects across the upper Midwest, the Rocky Mountains, and the Pacific Northwest.  Chicago, where all seven of the Class I railroad companies have major yards, is one of the biggest bottlenecks.  Rail transport is relatively low-cost and emits less CO2 than shipping by plane or truck, but investment in rail infrastructure has been slow.  Producers and consumers of coal, in particular, have traditionally been trapped in exclusive contracts that give them little leverage in negotiations with rail providers.  In September, Democratic Senator Jay Rockefeller of West Virginia introduced the Surface Transportation Board Reauthorization Act, which would increase the authority of the Surface Transportation Board, which regulates railroads, to force them to remedy service delays and justify rate hikes.  Lawmakers chided rail executives at a September 10 hearing in Washington for their failure to anticipate and keep up with increased demands on the railway system.

The problem is especially acute for mines in Wyoming’s Powder River Basin trying to ship coal to customers.  Big coal-burning utilities have already begun running coal plants at below capacity in order to conserve coal stocks.

Ship Gas, Not Coal

Some of this alarm is likely overstated; no one has suggested that coal plants are actually in danger of running out of fuel this winter.  And despite the transport constriction, the price of Powder River Basin coal remains stubbornly low; the price of a ton has dropped 8%, to $10.80, according to Bloomberg.  As a matter of national policy, it makes sense to reduce shipments of dirty coal by diesel-burning trains to supply aging power plants that are quickly becoming uneconomical anyway.  Meanwhile, tight coal supplies will inevitably lead to louder calls for other types of energy transport infrastructure: namely, natural gas pipelines.

There are good reasons to invest in expanding the nation’s railway infrastructure; shipping more coal is probably not one of them.


In Eastern Tennessee, the Future of Electricity Generation Takes Shape

— September 4, 2013

It’s been a cool, wet summer in the Southeastern United States, which has meant lower power sales for the Tennessee Valley Authority (TVA), the federally owned utility that serves 9 million customers across seven states in the region.  The TVA said last month that it sold 4% less power and took in 6% less revenue in the third quarter than the same period in 2012, mostly because of the mild weather, a weak economic recovery, and lower fuel prices.

TVA, which brought electricity and running water to much of the Southeast in the decades following the Great Depression, is facing many of the challenges that big utilities across the country face, and it has responded (or has been forced to respond) by beginning to phase out its coal-fired units in favor of gas-fired generation at modern combined cycle plants, including one at the John Sevier power station in Rogersville, Tennessee.  In 2011, the TVA signed a landmark agreement with four states, several environmental groups, and the U.S. Environmental Protection Agency that calls for the retirement of 18 units at three power plants, including the huge Johnsonville Fossil Plant in Tennessee, the Widows Creek Fossil Plant in northern Alabama, and the Sevier plant.  Two of the four units at Sevier have been idled, and the other two will either be equipped with modern emissions control equipment, converted to biomass-fired generation, or retired by the end of 2015.

The agreement, which was spurred by a lawsuit filed by the state of North Carolina over air pollution from TVA plants, also levied a $10 million civil penalty on the utility and calls for $350 million in investment in new pollution controls over the next 5 years.  The Sierra Club called it “one of the largest pollution reduction agreements in the nation’s history.”

Shifting to Gas

The transition at the Sevier plant was not a conversion, per se; TVA determined that switching the existing units to gas-fired generation would be much more costly than simply idling the coal units and building a new combined cycle plant.  The new John Sevier Combined Cycle plant went into commercial operation last year and has 880 MW of total capacity – about 490 MW in single cycle mode and another 390 MW in combined cycle – in which excess heat from the primary gas turbine system is recycled to drive a secondary steam turbine.  TVA says that, compared to the old coal units, the new gas-fired station will produce 40% less air pollution – half the carbon dioxide and 1% sulfur dioxide.

Last year the TVA said it had signed a lease-purchase agreement with an investor group known as John Sevier Combined Cycle Generation LLC, under which the utility will lease the $820 million to the company for $1 billion over 30 years.  Such complicated financing arrangements are a necessary strategy for the TVA, which lost $203 million on revenue of $7.9 billion in the first 9 months of this year.  Pressured by tightening regulations, market forces, and public demand for cleaner power, TVA, like many big utilities, is facing wrenching changes in the coming years.  Switching to advanced natural gas-fired power stations, like the new Sevier plant, offers one way forward for the TVA and for U.S. utilities in general.

For an in-depth examination on switching coal-fired generation capacity to natural gas, please join us for the Navigant Research webinar, Coal to Natural Gas Plant Conversions, on Tuesday September 10 at 2 p.m. Eastern time.


Power For The 20 Percent

— August 21, 2013

According to the World Bank, people worldwide spend about $37 billion annually on kerosene for lighting, biomass (typically wood or charcoal) used in open fires, and polluting traditional stoves for cooking.  These inefficient energy pathways not only cost too much, but they also impose severe health risks on indigenous populations and increase carbon emissions contributing to global climate change.

It’s estimated that more than one-fifth of humankind lacks modern energy services.  While the cost of providing universal access to the electricity grid, or to decentralized electrification systems, would be in the tens of billions of dollars annually, these “costs” also represent potential revenues for vendors of smart grid and microgrid enabling technologies, such as distributed generation, energy storage, smart inverters and smart meters.  The United Nations has made the goal of universal energy access a major priority, viewing the development of microgrids as a key enabling technology.

The International Energy Agency (IEA) estimates that the annual cost of achieving universal energy access throughout the world would be approximately $48 billion.  Under a base case scenario, the gap between expected costs and available (primarily public sector) funding is $34 billion annually.  The majority of this latter figure represents household lights and cell phone chargers.  However, more than 10% of this total represents vendor revenues in the remote microgrid space, if private investment, policy reforms and technology advances can be marshaled to meet market demand.  This is double the market for traditional utility grid expansion in the developing world.

By comparison, Navigant Research estimates in a forthcoming report that the size of today’s entire remote microgrid market is approximately $3 billion, but the scope of that revenue includes substantial project portfolios in both North America and Europe.

Local Goods

Can vendors respond to this challenge while still turning a profit? The jury is still out.  To date, it appears that private sector models are providing the best results, both for vendors and the consumers being served.

While rural cooperatives in Alaska have proven that publicly owned utilities can successfully deploy remote microgrids, the experience in the rest of the world with the cooperative business model has been less inspiring.  This approach has been deployed in Bangladesh and Nepal with some success, but in India – probably the largest market for remote microgrids in the world – such endeavors have largely failed.

In contrast, the energy service company (ESCO) model, whereby a private company owns, installs and operates the remote microgrid and provides energy services to consumers, is, with certain caveats, looking like the most promising path forward.  This model has found success in countries such as Zambia, Kenya, Sri Lanka, and the Dominican Republic.  There appears to be a growing consensus, however, that 3 megawatts (MW) of electrical capacity is the minimum size to make these private sector projects work.

A few caveats on private sector models.  They often require either a clear regulatory framework or long-term subsidies (or the elimination of existing subsidies for incumbent technologies).  A review of existing remote microgrids in the developing world indicates that success for remote microgrid business models ultimately rests in designing creative ways to generate income for the local communities being served.  In other words, business models must serve not only the entity that builds, develops, or owns the infrastructure, but also the end users – in the form of less costly or reliable energy, local jobs, quality of life – in other words, the basics that citizens of the First World view as their birthright.


Coal-To-Gas Plant Conversions Face Challenges

— July 5, 2013

The prospect of more stringent carbon emissions restrictions for existing power plants, as laid out in President Obama’s late-June speech on climate change, leaves the coal industry facing a series of hard choices.  Among the main questions: What to do with aging coal plants, many of which will be prohibitively expensive to fit with emissions-control systems to meet the new requirements?

One option is to simply decommissioning them – demolishing the plant, selling off the scrap metal, and finding a re-use for the brownfield site on which the plant was located.  A growing number of coal plant owners and operators, though, are considering converting those plants to run on natural gas: a seemingly straightforward changeover that would enable the same boiler, turbines, and other plant infrastructure to run on a fuel that is both less expensive than coal (for now) and less polluting.  A SourceWatch page on coal plant conversions lists dozens of such projects, from Washington, D.C. to California.

A closer look at these projects, though, indicates that converting to natural gas is neither as simple nor as cost-effective as it might appear.  Some announced projects have already been delayed, or killed; others are merely under consideration and may never become reality.  Many so-called “conversions” are, in fact, simply replacements, according to a 2010 study by the Aspen Environmental Group.

New Pipelines, New Hurdles

The problem is one of cost.  In many cases it’s simply cheaper to tear the plant down and start all over, rather than fueling the existing units with gas.  Combined-cycle gas-fired generation plants cost roughly $1 million per MW, installed; the cost of converting existing coal-fired equipment can be twice as much.  A 2012 study by engineering firm Black & Veatch considered several options for switching from coal to some form of natural gas generation for a hypothetical 250-MW power plant.  “Full conversion to natural gas only” and “Conversion to coal with natural gas co-firing” were the least cost-effective options, the study concluded; simply replacing the existing plant with a new combined-cycle system, fired by natural gas, was among the most attractive.

What’s more, older coal plants are not necessarily located in places served by natural gas pipelines.  New pipeline construction, accounting for rights-of-way acquisitions, metering stations, compressors, and other costs, can itself reach more than $1 million per mile, adding millions of dollars to the conversion, when a new plant integrated into existing natural gas infrastructure.

Thus it’s no surprise that some utilities with ambitious coal-to-gas conversion plans have begun to have second thoughts.  Minneapolis-based Xcel Energy, for instance, issued an RFP in March for new generating capacity that could replace the 109-MW Arapahoe plant and its 352-MW unit at the Cherokee plant, in north Denver.  Both of those stations had been slated to be converted from coal to natural gas.  The Tennesse Valley Authority, which last year said it would condider switching its huge Widows Creek Fossil Plant to natural gas, to coincide with a proposed natural gas pipeline across the Southeast.  That decision is now on hold.

Considering the growing public opposition to expansions of oil and gas infrastructure in the Lower 48, any major addition to the existing natural gas pipeline system has to be viewed as a long-term, risky endeavor.  Converting from coal to natural gas will no doubt be an option for many existing plants.  But it’s hardly going to be the answer for a majority of the country’s aging coal fleet.  These options will be explored in further detail in an upcoming Navigant Research report on decommissioning coal plants.


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