The Future Is Bright for Old Coal Plants

The move towards more sustainable energy sources can no longer be considered a fringe movement. With nearly 70% of global GDP now under net zero targets, the electricity that powers the manufacturing represented within those efforts must evolve to processes and raw materials with lower greenhouse gas emissions. What then is to become of the real estate (land, structures, and improvements) that can no longer serve the original intended use as cool or natural gas power plants with high emissions?  And how does one value that real estate, knowing a dormant coal power plant cannot be used for that intended use again? Thankfully, history suggests such properties make excellent locations for next-generation energy generation and storage.

a history of power generation

The 1900s coal-powered steam generators provided a pathway towards the western world’s expansion. Whether it be the Parsons’ steam turbine generator in the 1800s or the first pulverized coal steam generators at Oneida Street Station in Wisconsin in 1919, these plants unlocked levels of power generation that were previously unattainable. In 1938, Otto Hahn & Fritz Strassman pioneered nuclear fission as an alternative power source, and by the 1950s-1960s GE had further improved efficiency and capacity. The move by utilities to nuclear energy was stunted, however, by the 1979 Three-Mile meltdown, resulting in a national distrust for nuclear power and a continued reliance on coal and natural gas.

competition and the foundation of deregulation

During this same period, government regulations surrounding power generation and the public good also began to be passed. With the New Deal taking shape in 1933, Congress took the step to regulate large interstate holding companies which at the time controlled more than 75 percent of the country’s electric generating capacity. The Public Utility Holding Company Act of 1935 (PUHCA) forced holding companies to diversify and allowed utilities an effective monopoly over a limited territory. In exchange, utilities were to provide reliable electric service to customers at a regulated rate. Rates and territory were determined by the state, with the electricity supply chain (generation, transmission, distribution, metering, and billing) controlled by one entity.

Fast forward 40 years to the 1970s which brought long lines at the gas pump and rising electric utility costs. It also brought the most substantial regulation in over four decades with the 1978 Public Utility Regulatory Policies Act (PURPA) requiring utilities to diversify the power supply, encourage conservation (by adding wind, solar, etc.) and allow purchases from non-utility producers when utility supplies were low.

The 1980s and 1990s brought more acts by Congress and the Federal Energy Regulatory Commission (FERC) meant to protect consumers from ever-increasing power prices including:

• 1985: FERC Order 436 – Directing pipelines to offer transportation-only services with competitive prices resulting in a decoupling of gas transportation with gas producers;
• 1989: The Natural Gas Wellhead Decontrol Act – Removed federal price regulations and opened the sale of natural gas to distribution companies and consumers;
• 1992: The National Energy Policy Act allowed states to create competitive energy markets for private generators, energy retailers could purchase at wholesale rates & sell electricity directly to the end customer; &
• 1996: FERC Order 888 required utilities to open transmission lines to competitors resulting with competition programs in New Hampshire, Arizona, California, Massachusetts, Pennsylvania, and Rhode Island.

These acts created the foundation for a national deregulation plan, with the goal of increasing competition and limiting monopolies in order to control costs for consumers.

the power grid across the continental united states

Having an awareness of how power and energy regulations have shaped the industry is an important step when valuing a power plant, as is understanding our nation’s energy supply system. The U.S. power grid infrastructure consists of over 10,300 utility-scale electric power plants. Electricity, generated at centralized power plants or decentralized units, is transmitted through over 160,000 miles of high voltage power lines and millions of miles of low-voltage power line distribution transformers.

Three major grids cover the lower 48 states, The Western Interconnect (west of the Rocky Mountains and the Great Plains to the Pacific coast), the Texas Interconnect (Electric Reliability Council of Texas), and The Eastern Interconnect (from the Great plains eastward to the Atlantic coast). Power is sourced from a regional transmission organization (RTO) consisting of an electric power transmission system operator (TSO). TSOs coordinate, control, and monitor multistage electric grids and these grids are further broken down to California ISO (CAISO), Midcontinent ISO (MISO), Southwest Power Pool (SPP), Electric Reliability Council of Texas, PJM Interconnection, New York ISO (NYISO), and New England ISO (ISO-NE).

Power generation in the U.S. is sold at the wholesale and retail level, and individual states determine whether that process is regulated or deregulated. Wholesale electricity is sold among utilities while retail sales involve direct purchase by consumers. Crucially, independent system operators (ISOs) often consist of multiple power producing entities from both regulated and deregulated states. The MISO network for example covers all or portions of 15 states.

deregulation & green energies | consequences

As of 2021 there are approximately 26 states with some form of energy choice, six with deregulated electricity, nine with deregulated natural gas, and 11 with deregulated gas and electricity. In deregulated states, consumers purchase electricity from their retailer of choice and pay transmission and distribution fees to the utility.

Deregulated states compete for the sale of power on grids with regulated states, and recently there has been increasing competition through state and nonprofit grants for renewable energy installation, research, development, infrastructure, business development, system testing and feasibility studies. As a result, barriers of entry have been lowered, incentives for alternative energies are increasing, and coal-produced power from deregulated states cannot successfully compete. When analyzed, nearly one-fifth of coal plant power generated in the Midwest was found to be operated uneconomically at a cost of over $4.6 billion to consumers.

This push for renewable energy production is in part due to Renewable Portfolio Standards (RPS) which effectively requires that large investor-owned electric utilities and alternative retail electric suppliers (ARES) produce a portion of eligible retail electricity sales from renewable energy. Suppliers qualify by demonstrating that they have a minimum percentage of their electricity produced from wind energy or photovoltaic solar sources. Thirty states, Washington D.C. and three territories have adopted RPS guidelines.

coal yesterday | solar tomorrow

Coal plants simply cannot compete in the current market. A strong alternative for many of these plants is a pivot to renewable energy production. Notable coal-to-solar plant transitions include the Nanticoke Generating Station in Ontario, the planned conversion of the King George Coal plant in Virginia, and the multiple planned closures and conversions by Vistra Corp throughout Illinois, Texas and California.

real estate valuation in a deregulated world

In regulated states, power plants paid funds proportionate to the power produced by existing power plants. Deregulation resulted in appraisers approaching the valuation of power plants differently, not on revenue or power plant capacity/generation but rather on the value of a property considering the real estate only (land, structures, and improvements). As a majority of coal-fired power plants are vintage in nature, there is limited information available due to the often internal sale/acquisition these properties undergo. This is compounded by the fact that power plants are often sold as portfolio acquisitions predicated on the business value and not necessarily the real estate.

In our experience, utility-scale power generation requires a site near water for cooling reactors/boilers, power turbines, internal operational purposes, transfer points of raw materials; basic infrastructure such as roads, lights, underground pumps, conveyor belts, large diameter gas pipelines; and pressure line stations. If near a river, the property often has barging capability with improvements that may include cement/steel seawalls, cement/steel dolphins anchored into bedrock, load-bearing concrete for cranes, rail spurs, and underground conveyors for delivery of raw materials to the plant. The property often also spans multiple hundreds of acres of land surrounding the plants main operations.

The shell or exterior wall of the plant may be as high as eight-to-ten stories and protects equipment from elemental wear and damage. Within the shell of the plant are typically metal grating floors with the entire structure being a shell of sheet metal with one to three load-bearing floors.

highest & Best use considerations

Once a coal plant’s operators allow its operational permits to expire, the plant cannot be used for power production via coal again. But is this the end? Due to the nature of the operation and scale, power plants often have excess land with the entitlements to produce power in the immediate vicinity of the power plant. An analysis of the excess land alone often reveals undisturbed and undeveloped land that possesses recreational land value.

New value can also be created for existing assets. Solar array fields are a positive re-use of closed-in-place (CIP) coal combustion residual (CCR) units or coal ash ponds and landfills, which are filled, capped and provide great platforms for solar panels. A coal ash landfill/pond can range in size between 50-120 acres which accommodates a solar array of between 10 MW to 100 MW. For reference, a utility-scale solar power plant generally requires approximately 5-10 acres per megawatt. Of crucial importance, the infrastructure for a repurposed power plant site may already be in place (power lines, active switchyard/substation) and the sites are already zoned for heavy industrial use.

approaches to value

Income Projection is not a viable approach to value as a coal-fired power plant is not leased as real estate only, and income generated from the property speaks to going concern value. Additionally, the Cost Approach is often criticized as properties are often many decades old and the facilities do not meet present building standards.

The asset is often old and physically depreciated and such properties were not built for continued power plant operations for alternative energies. Yet, economically there is still demand for power along with multiple incentives for renewable sources, together with allowing for the rebirth of vintage coal plants This, of course, leaves the Sales Comparison Approach.

While there are likely few comparable sales and offerings for like-kind product, this data does exist, although power plants are usually bought and sold as going concern/business value associated with the business including remediation for contaminated lands. While real estate only sales do exist, the purchase and sale of equipment and going concern value can hide the value of the real estate. This data is often difficult to get and an appraiser must separate the deals as they pertain to the real estate only.

not your grandfather’s power plant

The evolution of power plants and energy creation is just in its infancy. There are plenty of examples of future innovations for coal-powered plant real estate sites. Take for example, Wardenclyffe Laboratory, Nikola Tesla’s 57-meter tower that was built to one day transmit electricity wirelessly with no switching station, transmission lines or power grid required. Or the International Thermonuclear Experimental Reactor (ITER) in Saint-Paul-lès-Durance, France, which was conceived to produce energy using superconducting electromagnets and is cooled with liquid helium.

As our society evolves, so too must the sources we use for energy. Whatever the future may hold, the need and purposes of real estate will evolve, and appraisers will be faced with the unique and nuanced challenges of valuing and identifying what these properties are best suited for in their old age. In the case of vintage coal plants, their future is bright as the locations for our newest energy sources.

A condensed version of this blog appeared in Valuation Magazine. It can be viewed here.