Dominion’s Brayton Point Coal Plant Is Financially Unsustainable Despite Billion Dollar Investment in Upgrades New Report Shows

‘Perfect Storm’ of Conditions Suppressing Earnings Expected to Continue Through 2020

CONTACT:
Karen Wood, CLF, (617) 850-1722, kwood@clf.org

BOSTON, MA  February 28, 2013 – An independent analysis of the financial performance of Dominion Resources’ Brayton Point power plant in Somerset, Massachusetts, released today by the Institute for Energy Economics and Financial Analysis,  projected a bleak future for the 50-year-old coal-fired facility, the largest remaining coal plant in New England. The report, Dark Days Ahead: Financial Factors Cloud Future Profitability at Dominion’s Brayton Point, found that the once profitable power plant’s earnings before interest, taxes, depreciation and amortization (EBITDA) are plummeting due to a perfect storm of market conditions that are projected to continue at least through the end of the decade. The report shows that those conditions make it unlikely that Brayton Point will ever recoup its recent $1 billion investment in upgrades to the facility, or return to profitability. The report was commissioned by Conservation Law Foundation, which has been a regional leader in shaping New England’s transition away from coal toward a clean energy future.

The authors will present their findings in a teleconference for press and analysts today at 11:00 AM EST. Registration is required.

“Brayton Point is looking at losing money for the foreseeable future,” said David Schlissel, who co-authored the report with financial expert Tom Sanzillo. “The market conditions have changed and are continuing to change for old coal plants. There is nothing on the horizon that shows that this power plant will be able to return to financial health; in fact, even the most optimistic scenario shows that Brayton Point cannot produce earnings that would cover its costs and produce a return for equity investors at any time through 2020.”

Sanzillo added, “The forecast for Brayton Point is indicative of what’s happening all over the country. We are seeing the owners of these 50-year-old coal-burning facilities facing do or die decisions about their futures, with hundreds having already announced their plans to retire in the next few years and more going that route every month. Brayton Point’s current experience – bleeding money and owner Dominion Resources having already written off $700 million of its $1 billion investment in upgrading the plant – and its bleak outlook clearly show that continuing to operate this plant doesn’t make economic sense.

A Perfect Storm of Changing Conditions Sends Earnings Plummeting

The report points to a set of changed conditions that together are putting severe downward pressure on Brayton Point’s earnings, which dropped from $345 million in 2009 to an anemic $24 million in 2012, a decrease of some 93 percent:

• Natural gas prices have declined significantly since 2008 and are expected to remain low for at least the remainder of this decade.
• Wholesale energy market prices have decreased in response to the declining natural gas prices,  meaning reduced revenue for coal plant owners and reduced generation at coal plants like Brayton Point.
• Meanwhile, prices for capacity have been also been declining with a 35% decrease in the price obtained in the Forward Capacity Auction in 2012 as compared to the price for 2010.
• Additionally, energy usage in ISO-NE decreased by 2-3 percent between 2008 and 2012 as a result of the economic downturn and increasing energy efficiency efforts.

Future Profitability is Unlikely

The report provides two extremely conservative scenarios of future performance: an “optimistic scenario,” in which generation from Brayton Point coal Units 1-3 is projected to rise to a 60% capacity factor through the years 2013-2020, and a “less optimistic” scenario, which assumes that the units’ generation will not exceed 40% for any year in the period. In 2012, Brayton Point’s Units 1-3 operated  at an average 16% capacity factor. Thus, the report says, earnings from those units could be much lower than projected in the two scenarios modeled.  “In no way have we looked at a ‘worst case’ scenario,” noted Mr. Sanzillo.

In both scenarios, based on forward-looking conditions, the report shows that it is unlikely that future energy market prices, ISO-NE capacity market prices, plant generation and coal prices will lead to earnings high enough to provide its owner with  adequate recovery of capital or return on investment.  The report’s conclusions are based on projections that show that it is reasonable to expect that for the remainder of this decade, at least:

• Energy market prices in New England will remain low, reflecting continuing low natural gas prices.
• Energy consumption in New England will remain flat while consumption in Massachusetts may decline.
• Bituminous coal prices will increase over time.
• As a result, the generation at Brayton Point Units 1-3 is not likely to reach the high levels of performance achieved by the units through 2009.
• Future New England capacity prices are not likely to increase significantly.

On the longer horizon, from 2020 on, the report points to increasing pressure to place a significant price on carbon emissions from fossil fuel-fired power plants, and the plant’s age, as additional factors that will likely weigh on the plant’s earnings.

N. Jonathan Peress, VP and director of Conservation Law Foundation’s Clean Energy and Climate Change program,  commented, “Brayton Point, like many other old coal plants in New England and around the country, is at a tipping point. Dominion has already made a losing investment in trying to make this plant viable beyond its useful life. Now, Dominion and its shareholders need to decide whether to keep pumping money into Brayton Point with little chance of a return, as this analysis clearly shows, or to let it go. This report provides compelling evidence for the Town of Somerset, which has been seeing its tax revenue from the plant decline in recent years, to begin planning for Brayton Point’s retirement, and a healthier future for that community in all respects.”

 

The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the United States’ transition to a diverse, sustainable and profitable energy economy and to reduce the nation’s dependence on coal and other non-renewable energy resources.

Conservation Law Foundation (CLF) protects New England’s environment for the benefit of all people. Using the law, science and the market, CLF creates solutions that preserve natural resources, build healthy communities, and sustain a vibrant economy region-wide. Founded in 1966, CLF is a nonprofit, member-supported organization with offices in Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

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