So You Want To Shut Down Your Coal-Fired Power Plant?

Tuesday, September 23, 2014 - 21:54

For the last five or so years, coal-fired power generation (CFPG) plants have been under assault, primarily from federal regulatory efforts aimed at drastically reducing environmental impacts from those plants. These regulatory restrictions range from limiting emissions of sulfur oxide (SOX), nitrous oxides (NOX), mercury and greenhouse gases (such as carbon dioxide) to regulation of cooling water intake. States are also piling on with regulation of the storage and disposal of combustion residues (also known as coal ash), which are generally disposed of on-site.

The major federal regulatory initiatives in just the last five years include the Clean Air Transport Rule, Cooling Water Intake regulations, Mercury MACT Rule and mandatory reporting of greenhouse gas emissions. Most recently, EPA issued draft regulations requiring states to reduce carbon dioxide emissions by 30 percent from 2005 baselines. While these proposed regulations provide states with flexibility on how to achieve those reductions, it is clear that one significant manner in which the reductions can be achieved is by clamping down on the major emitters of carbon dioxide: coal-fired power generation units.

The inevitable result of this full-frontal assault on coal-fired power generation is the forced shutdown of hundreds of CFPG units throughout the United States. In fact, primarily in response to the mercury regulations, we have already seen more than 150 CFPG units shut down in the last four years. It is likely that this pace will increase significantly in the next five years if EPA’s greenhouse gas regulations are promulgated. Some estimates put the number of CFPG units likely to be shut down in the next five to 10 years at more than 200 – what could be 50 gigawatts of power.

These shutdowns will have a significant impact on the nation’s power generation capacity. The domestic power grid is already stressed substantially during peak demand – removing 50 gigawatts will only magnify that stress unless replacement power is brought in immediately. That will be no easy task given that most sources of readily available replacement power – gas-fired, oil-fired, solar and wind – require substantial capital and burdensome and time-consuming regulatory approvals.

Despite the obvious downsides from this likely mass retirement of CFPG units, probably the most significant potential downside is the cost and operational burden associated with shutting down such units. Simply flipping the switch is not an option. Shutdowns of CFPG units, many of which have their 50th birthdays well behind them, can have widespread and varied  employment, tax, environmental and safety ramifications. Minimizing the costs and negative business impacts associated with these ramifications requires advance planning and a knowledgeable and experienced team. Furthermore, consideration of future use of the buildings and properties can further reduce net costs of the shutdown and minimize adverse impacts, such as community and governmental opposition.

In this article, we present a holistic blueprint for shutting down CFPG units, with an eye toward reducing or eliminating the costs and business impacts. No two CFPG unit shutdowns are the same, but this blueprint applies to all successful shutdowns.

Determine Employment Issues

One of the first analyses in preparation for a CFPG unit shutdown is measuring the impact a shutdown will have on employees at the plant. Understanding the impact that the shutdown will have on each potentially impacted individual is critical to the success of the shutdown. Can employees be reassigned or will there have to be layoffs? Are any of the employees covered by union contracts? If so, what is required under those contracts? The costs associated with employment issues for employees at the plant can be significant, as can the strife and discord caused by employees who will lose their jobs.

One commonly overlooked issue is the impact that disgruntled employees can have on the shutdown. Disgruntled employees frequently become whistleblowers, often approaching regulators with tales of skeletons in the closet, many of which are of historic environmental spills and disposal from the plant. Sometimes the allegations are true, but many times they are not or are mistakenly portrayed as unlawful activity. Investigations required to vet these issues can be costly and, more importantly, can precipitously shut down a shutdown. Minimizing the number of disgruntled employees up front tends to minimize the number of potential whistleblowers and reduce or eliminate snags down the road.

Assess Regulatory Issues

The shutdown of a CFPG unit will likely trigger regulatory considerations. Crucial regulatory issues include approvals from the Federal Energy Regulatory Commission (FERC) and the state public utility commission. Given the close and substantial regulation of power generation and distribution by both federal and state governments, it is critical to understand the process, timing and likelihood of obtaining the approvals necessary from FERC and the state public utility commission.

Besides the energy regulatory issues, there will also likely be additional regulatory issues. For instance, several states, including New Jersey and Connecticut, have environmental transfer statutes and regulations that may require investigation and, if necessary, remediation of environmental conditions at the CFPG unit property. In New Jersey, for instance, the Industrial Site Recovery Act (ISRA) could be triggered by the announcement of a shutdown, resulting in the requirement to investigate the environmental conditions at the property. Whether ISRA is triggered requires analysis of the circumstances around the shutdown.

Furthermore, shutting down a CFPG unit will likely require termination – or return to issuing agencies – of permits associated with the affected unit. These permits must be scrutinized to determine whether the termination triggers any other actions, such as closure of permitted areas of the unit like wastewater treatment plants, hazardous waste storage areas or coal ash disposal areas.

If there are any consent orders associated with the unit, they should be examined to determine if they have any requirements triggered by a shutdown. Similarly, if the unit being shut down is on leased land, the lease must be reviewed for any obligations that may be triggered by the closure.

Anticipate Public And Political Reactions

Perhaps the most difficult aspect of a CFPG plant shutdown is gauging and managing the public and political reactions.  In general, nearby residents will react positively to the removal of an industrial plant from the neighborhood, which enhances the local environment. However, that reaction could be tempered by the resulting loss of tax base, the likely loss of jobs and the potential increase in power costs.

Likewise, the political response will be mixed. Certainly, politicians will recognize and trumpet the environmental gains that result from the closure of the plant. However, the loss of tax base and loss of jobs may negatively affect the political district where the plant is located, absent redevelopment.

The most difficult aspect of dealing with the public and political responses is that those responses may change over the course of the project. Initial supporters of the shutdown may change their tune later when they realize a consequence that they missed in the early days. Conversely, detractors can be won over if, for instance, redevelopment plans will provide benefits to them. Managing the public and the politicians in a CFPG shutdown has characteristics similar to riding a mechanical bull – you have to hang on tight, sense seismic shifts in direction and react accordingly.

Assess Environmental Issues

One of the more obvious issues that must be dealt with early on is the environmental condition of the plant. Most CFPG units to be shut down have long and often “dirty” histories. Regulators will be laser focused on the environmental condition of the plant and what they believe needs to be done to protect human health and the environment after the shutdown.

More importantly, though, the environmental condition of the plant will be key to the future redevelopment prospects. As the redevelopment potential of a site is usually critical to the economics of the shutdown, that potential must be married with the environmental realities of the property. An urban power plant that sits on the banks of a beautiful river may be well suited for a condominium project, so the environmental condition of the site will need to meet regulatory scrutiny associated with a residential end use. On the flip side, a redevelopment use that will be commercial or industrial will not have to have the same level of environmental cleanliness that a residential use would require. Therefore, the costs associated with the environmental remediation of the site may vary drastically based on the redevelopment potential.

It’s What You Keep That Counts

As discussed above, the redevelopment potential of the property can drive the environmental remediation requirements.  Furthermore, it can drive the economics of the project. In fact, it is probably the single most important factor in the decision tree for the project. The redevelopment potential of the site is critical to virtually every issue associated with a CFPG unit shutdown. A property that has high-value redevelopment potential will obviously offset costs associated with the shutdown; it can be sold or leased to a redeveloper at a premium. 

However, if such redevelopment requires environmental remediation to residential standards, demolition of structures or a lengthy regulatory approval process, the offsets can be reduced. What may look like a high-value redevelopment potential may actually result in the least economically attractive option. To the contrary, an industrial re-use of the property that does not require extensive environmental remediation or demolition of the existing structures may not bring in the maximum redevelopment value, but the redevelopment costs will also be much lower.

Will Demolition Be Involved?

If demolition is necessary because of redevelopment plans or because, in the absence of redevelopment, costs associated with maintaining building structures is deemed excessive, the complexion of the shutdown will change. Demolition brings with it a number of issues. On the cost side of the ledger, demolition will likely involve consideration of abatement of lead-based paint and asbestos, and potentially remediation of PCB-contaminated building materials. These issues, especially in older structures, can add significantly to the cost of the demolition. On the other side of the ledger, demolition can yield value for scrap, such as copper and steel. The value in scrap from the buildings can substantially offset the demolition and abatement costs.

Is the Property Going To Be Sold?

Most redevelopment scenarios include potential sale of the property, in part because selling the property may eliminate carrying costs of a non-performing asset. However, selling a former CFPG plant requires a detailed understanding of the environmental and building concerns, and a careful apportionment of liabilities. Insurance may be a vital part of this apportionment, especially if the buyer is not financially sound or is a single-purpose entity. 

As much as a seller of a CFPG plant may want to absolutely extinguish its future liability for existing environmental contamination, whether known or unknown, ultimately there is no such thing.  A seller will always have potential liability. Insuring against that liability, either through indemnity from the buyer or through insurance products, is possible, but to the extent that the insurance or indemnity is not available or is exhausted, federal and/or state environmental laws will always give the government a path back to the seller’s front door.

Assembling The Right Team

Obviously, there are many issues attendant to shutting down a CFPG plant. It is of critical importance that you assemble the right team of experts before the threshold decision of whether to shut down is made. At a minimum, the team should include real estate and redevelopment experts, public relations experts, financial and accounting experts and engineering, environmental and demolition experts. Moreover, it will be critical to assemble a full-service legal team made up of attorneys with capabilities in project finance, corporate transactions, energy regulation, environmental, labor and employment, real estate, insurance, tax and tax appeals. 

This team, once pulled together, will provide the appropriate input, knowledge and experience to make sure that the right decisions are made from the beginning to the end of the project.

John J. McAleese, III is a Partner in the Environment & Energy Practice Group and assists energy producers and other industrial clients in regulatory, transactional and litigation matters. F. Traynor Beck is Managing Partner of the Philadelphia office and regularly assists clients in corporate acquisitions and dispositions, as well as corporate finance matters.

Please email the authors at jmcaleese@mccarter.com or tbeck@mccarter.com with questions about this article.