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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Why Is Warren Buffett Ditching His Coal Plants?

Warren Buffett, probably the world’s most successful investor, a man noted for the conservatism of his investment policy and aversion to high tech, wants out of coal? Buffett’s Berkshire Hathaway controls a string of electric utilities that, in the past, burned plenty of coal.

One of his largest utility holdings, PacifiCorp controls coal burning utilities throughout the west. It wants to phase out coal-burning power stations in Wyoming. Reason: according to a PacifiCorp official, a combination of renewables and energy storage is “really lower-cost than continuing to operate some of our existing fleet.” Notice the wording. The official did not say that the renewable package is cheaper than building a new coal station. He said that is was cheaper than running their largely depreciated coal plant built at low costs decades ago. “Our customers would… save money… by pursuing these… alternatives…” the executive added.

The announcement came in recently filed integrated resource plan (IRP), a long range planning document. Typically, no surprises in these documents. But not this time. Furthermore, PacifiCorp did not propose the usual utility solution: to replace the coal units with gas-fired stations. The company intends to shutter 8,100 MW of coal generation and replace them with wind, solar and battery storage. The IRP claims that continuing to burn coal is “inconsistent with reliable, low cost service.” We don’t think reliability was the main concern, here. Simply stated, coal is no longer competitive with renewables. That would be an astounding conclusion because PacifiCorp operates mine mouth stations located at low cost mines. No railroad transport costs for the coal., which made a big difference. If those stations are no longer competitive with renewables plus storage, where can coal compete as a boiler fuel?

But there is a big difference between lower fuel costs, like mine mouth coal, and zero fuel costs, like wind and solar. Once the capital costs between the competing technologies becomes even close, the lifetime operating savings or renewables become impossible to ignore. And if the capital cost of renewables continues to decline, the economics simply become even more compelling.

The difference between coal fired generation versus renewables is like the difference between two, identical automobiles except that the conventional one requires frequent trips to the gas station and the other does not. We suspect that consumer preferences would shift to the latter.

Wyoming, where most of the plant closures will take place, has not taken kindly to the proposal. The state depends heavily on coal revenues of roughly $1.50 per ton mined. Tonnage has already fallen from 400 million to 300 million tons and the accompanying loss of revenue is straining the state budget. Loss of high paying coal jobs is another worry. The state already passed a law requiring plant owners to seek buyers for plants they intend to close. That law, of course, does not address the problem: if the plants cannot compete, who would buy them?

Almost 40 years ago, the British tried to keep the coal industry open in a competitive market, and they could not. The politicians who tried were the British Conservatives, who hated the miners’ unions and claimed to believe in competition and free markets, but could not overcome the fact that coal was not competitive against natural gas.

The small “C” conservative in Wyoming are learning the same lesson— either abandon coal or admit that everyone should pay more for commodity electricity. To complicate the matter, several neighboring states have passed laws that will close off sale of coal-fired electricity to those states. That will make it harder for PacifiCorp to find buyers for the stations. So, when the state regulators have to deal with PacifiCorp’s IRP , what will they say?

In a funny way, the surprise, here, is what is missing, by which we mean the absence of “greenwashing”, or any environmental pretense whatsoever. They are closing the coal stations, in some instances two decades sooner than planned, in the heart of coal country. And not one word about decarbonization as a justification.

The PacifiCorp IRP reminds us of a simple fact of life in commodity businesses. That is, the lowest priced producer always wins. And right now, it looks as if renewables are cheaper than coal.

By Leonard Hyman and William Tilles for Oilprice.com

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  • Steven Soychak on December 31 2019 said:
    This is hogwash and greenwash that so called renewables are cheaper than coal and natural gas power plants. Many utilities do not include the transmission cost in their bids for wind which takes significantly more transmission lines than conventional power plants due to their low power density. They also do not account for the intermittentency or unreliability which causes backup conventional plants such as coal and gas to bear the burden of running less efficient.

    The reason utilities are hiding intermittent/transmission costs and pushing this is because they are able to recoup up to 10% on return on equity on the more money they spend. When they spend more, they make more. An attached is a link of a University of Chicago draft white paper that shows 29 Renewable Portfolio States (RPS) are 17% higher in cost/KWH than the other states. This can easily be verified when you look at the EIA data that shows many of the high wind penetration states (Iowa, Kansas, Minnesota, Colorado, California, and Colorado have gone up an average of 28% over the past ten years where the national average is about a 11% increase. A good thing that Coal and Natural Gas Prices have gone down significantly since that time or costs/KWH for these states would be a lot higher.
  • Ronald Wagner on December 31 2019 said:
    No, what Buffet is actually saying is that the customer will have to PAY MORE to please the elites who control things. He is doing this because he can and will further his reputation by doing so.

    I am a natural gas advocate. Wyoming has plenty of natural gas available and should switch to it. They have natural gas and so do the Dakotas. They can also ship it, and use it for heating, transportation, etc.
  • Lee James on January 01 2020 said:
    A utility IRP is a long-range plan. Maybe I missed it, but I don't think the Buffet companies are proposing to all close down soon -- I think it's a transition, over time.

    In terms of the straight cost of producing power, renewable energy is now at parity with natural gas, not considering the need for renewables to lean on stand-by power from fossil fuel. I believe true parity comes when renewable energy is stored suffieciently to handle time-of-day, weather and seasonal power-producing shortfalls.

    I find it interesting that power planners are placing a high degree of confidence in future electric storage. Engineers, I assume, are extrapolating out storage cost and capacity development and projecting that it's will be adequate to meet future demand.

    We need to make this plan work. In addition we need adequate clean power for electric vehicles. We desperately need a clean transportation sector after years of progress in cleaning up energy use in buildings.
  • LEONARD HYMAN & WILLIAM TILLES on January 06 2020 said:
    Let me make few points about the thoughtful comments we received

    Steven Soychak cites the U of Chicago draft, which says that prices went up 17% in the 12 years from beginning of the renewable portfolio standard (RPS), an increase of about 1.3% per year. (not that prices were 17% higher than in other states). It also criticizes the efficiency of the RPS. in terms of cost per ton of greenhouse gas (GHG )removed. I can’t quarrel with either of those two points made by the Chicago researchers, although I don’t think their “likely” explanations were that convincing. As to the comment about the motivations of utility managements, (basically the the Averch-johnson thesis), there is another issue here. PacifiCorp filed an Integrated Resource Plan (IRP), which is suppose to integrate all costs into decision making, and they did so in a state that depends on fossil fuels, not a friendly jurisdiction to attempt to dump coal in favor of renewables. They can’t make their case if all the factors cited by Mr Soychak overwhelms the perceived savings from moving from coal to renewables.

    Ronald Wagner believes Mr Buffet is switching from coal to burnish his reputation. Subsequent to our article, he indicated that he does things like this because they pay. PacifiCorp, in the IRP, will have to demonstrate that the proposed actions make economic sense, so let us not prejudge. I would be surprised if PacifiCorp would file it did not have a strong case.

    Lee James is correct to put so much emphasis on storage. and the need to get decarbonization right. Consider this: electric generation accounts for roughly one quarter of GHG emissions and transportation another quarter. Since the basis of most GHG removal plans involves electrifying the economy, if the electric industry is not decarbonized first, there is not much point to doing anything.

    But this is just getting away from the main point of the article, which is that when a coal-burning utility in a coal-mining state with its plants on top of coal mines thinks it should close down those facilities in favor of renewables, we need to pay attention.

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