Is converting coal to gas the right move?
What's the fix?
As utilities consider shifting their generation mix away from coal and toward more efficient fuels such as natural gas, they need to consider a number of complex factors.
For decisions of this scale and complexity, we recommend a structured investment decision-making approach enabling utilities to understand their options, effectively assess the feasibility of the options and make risk-informed decisions regarding their aging coal-fired assets.
Understand the options
Utilities need to consider a range of options based on a number of factors, such as the technical viability of conversion, market uncertainty, changes in regulations and the cost to convert existing equipment. The potential conversion options for each coal unit should be evaluated carefully for technical feasibility, which in turn impacts project costs.
Evaluate each option
Once the utility understands its options, it should evaluate each option for economic viability. This would ideally include developing a driver-based model to calculate a plant’s gross margin, from which it can calculate the net present value of free cash flows and estimate the generation asset value under each option.
Utilities must analyze these critical asset decisions at a portfolio level to optimize capital spend across the fleet rather than on an asset-by-asset basis.
Conduct scenario-based planning
In addition to determining the economic viability of available options, utilities may want to consider conducting sensitivity testing, simulation and/or scenario analysis to understand how other factors, such as market or regulatory forces, may impact each option. Utilities would then be able to use a risk-informed perspective to compare the value associated with coal-to-gas conversion to that associated with early retirement or retrofit for emission controls.
Consider creative alternatives
Utilities should leverage the analytics above to introduce alternatives not previous considered, including any real options embedded within their control. In addition, partnerships with component manufacturers, joint development partners, local communities interested in jobs and tax incentives, and/or natural gas pipeline owners can make average projects look extremely lucrative.