How to make a critical asset decision in the face of uncertainty

Is converting coal to gas the right move?

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How to make a critical asset decision in the face of uncertainty

In Becker, Minnesota, Xcel Energy's coal-fired plant has been operating for more than 30 years. But over the next 12 months, Xcel will likely decide the future of the Sherburne County Generating Station as it reviews its long-term power needs.

Xcel Energy is not alone. Reports by plant owners and operators to the US Energy Information Administration (EIA) suggest that utilities plan to retire 175 coal-fired generators between 2012 and 2016. The 27 gigawatts (GW) of coal-fired capacity expected to be retired in that time frame is more than four times greater than the 6.5GW of capacity utilities retired in the preceding five years.

Coal is still the primary source of energy in the US, fueling 50% of power needs.

As the Environmental Protection Agency (EPA) and other regulators and agencies continue to introduce rules that impose limits on carbon dioxide and other emissions from new and existing power plants, utilities with aging coal-fired plants are thinking about accelerating the retirement of these assets in lieu of making costly capital investments to mitigate their environmental impact.

Furthermore, as natural gas prices continue to hover around an all-time low and as technology makes abundant shale gas deposits more accessible, natural gas is becoming even more attractive as a replacement energy source for an increasing number of utilities.

Although the number of large-scale conversion projects announced is small relative to the number of expected retirements, major utilities appear to be increasingly interested in evaluating the conversion of their coal assets to burn natural gas. The question is, how should leading utilities approach this complex decision?