PSEG Takes Two Coal Plants Out of Service, Is Gas Obvious Alternative?

Tom Johnson | October 6, 2016 | Energy & Environment
Back-of-the-envelope calculations puts natural gas ahead on cost, but company is still weighing options on complex question

With yesterday’s announcement by PSEG that it will close its two coal-fired power plants in Jersey City and Hamilton next June, the question is whether the company will replace them with lower-cost natural gas units.

That was what happened when PSEG Power decided to shutter its aging Sewaren site and replace it with a new and more efficient $600 million unit, but some factors, including additional costs, may preclude that option for the two coal plants.

PSEG is evaluating its all options for its Hudson and Mercer county sites, including repowering the plants or redevelopment, according to Bill Levis, president and chief operating officer of PSEG Power. “We have not looked hard at any of the options,’’ he said.

Environmentalists, who have long sought the closure of the coal plants, hailed the retirement of the two units, but the decision was driven more by economics than any other factor. Coal just cannot compete with less-expensive natural gas, as evidenced by the fact that when the two plants did operate, they ran using gas, not coal with rare exceptions.

Adding to the plant’s poor business fundamentals, neither of the facilities were called on by PJM Interconnection to provide backup power, dubbed capacity in energy jargon, in the past two auctions overseen by the operator of the regional power grid. Without those capacity payments, the units lost a lucrative revenue stream.

In evaluating the Hudson and Mercer plants’ future, the significant investments needed to meet tougher reliability standards were not justified, Levis said. That was not the case with Sewaren, he said.

Sewaren is one of five new natural-gas plants that have either begun operations or are planning to open in New Jersey. It is part of a nationwide trend in which coal has been displaced by the other, lower-cost fossil fuel, said Paul Patterson, an energy analyst with Glenrock Associates.

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PSEG Power has long touted its fuel diversity, generating electricity from its fleet of gas, nuclear, and coal plants. The decision to retire the two coal units is especially difficult given that the company has invested close to $2 billion in new pollution equipment in the past decade to comply with tougher environmental mandates. Hudson began operating in 1968; Mercer, in 1960.

For environmentalists, shutting down the sites will leave only one coal unit operating in New Jersey, a small cogeneration plant in Logan Township. They are trying to phase out fossil fuels in favor of renewable sources of energy, such as solar and wind power.

“For us, this is a big deal,’’ said Jeff Tittel, director of the New Jersey Sierra Club, which has been opposing the plants for two decades. “It’s good for the environment and it’s good for ratepayers because these plants are not money-makers.’’

The closure of the plants still must be reviewed by PJM, which could order one to remain open, if it was determined necessary to maintain reliability of the grid. Once PJM is officially notified, a 90-day review begins, according to Ray Dotter, a spokesman.

In the past, the grid operator had ordered one of the units at Hudson to remain open when the company wanted to shutter it, but upgrades to the region’s transmission system and new power plants coming on line in the state have eased reliability concerns.

Both plants are located on large tracts, which offer other development opportunities. Hudson is situated on the banks of the Hackensack River on about 100 acres; Mercer is located on 130 acres along the Delaware River.

In some areas of the country, such as Philadelphia and Alexandria, VA, other shuttered coal plants have been replaced with mixed-use developments, focusing on the waterfront, Tittel noted.

Jersey City Mayor Steve Fulop, who had sought the closing of the Hudson unit, said in a statement he is looking forward to meeting with the company to discuss the future of the site. “It is a big tax-paying property, so we are very aware and engaged where this goes,’’ he said.

For PSEG, the owner of the units, the closure will erode its bottom line. It will take one-time charges for energy costs and operation and maintenance expenses, ranging from $40 million to $70 million and from $35 million to $77 million, respectively.

In addition, there will be ongoing incremental noncash charges to earnings of $560 million to $580 million in 2016 and $940 million to $960 million in 2017, due to the shortening of the expected lives of the two plants.