As both de-regulated and regulated power markets continue to shift towards renewable generation and away from more emissions-intense fossil-fuel-based generation, weather events and climate change will continue to present challenges—particularly for hydroelectric power. But in 2022 expect to see sustained growth in wind and solar capacity, increasing investment in nuclear power, and an acceleration of previously announced coal retirements.
Thermal Plant Retirements Continue to Accelerate
While coal power plant generation saw a brief reprieve in 2021 thanks to recovering electricity demand and strong natural gas pricing, that didn’t stop coal-fired asset owners from continuing to announce new retirements and accelerating previously announced retirements. Utilities and plant operators have come under increasing pressure to decarbonize, either internally motivated to meet company-mandated goals or from external political and consumer pressures.
In 2021, 39 gigawatts (GW) of U.S. coal plants announced their decommissioning plans. That equates to 17% of the U.S. coal fleet. Taking into account previously announced 70 GW of coal retirements, that puts nearly half of the U.S. coal fleet set to retire. While some of these retirements are as far out as the 2040s, expect an acceleration following growing pressure post COP26. In 2021, 15 GW of announced U.S. retirements were accelerated by an average of 3.5 years. Both metrics are expected to increase in 2022.
Outages in the West
Just as we saw in 2021 with the outages affecting the Electric Reliability Council of Texas (ERCOT) due to Winter Storm Uri, nature and a changing climate will continue to wreak havoc on power markets in 2022. A weak start to the winter 2021/2022 snowpack in the western U.S. will potentially lead to continued historically low hydroelectric generation. Historically hydro contributes to about 20% of electricity generation in the summer; however, as prolonged droughts in the western U.S. have become more severe, the share of hydroelectric generation has fallen, hitting a low of 14% in 2021.
With most of the western U.S. now in severe drought and a historically weak start to the 2021/2022 winter, hydro generation will likely continue to fall in 2022. That will put the Western Interconnection and regional power grid operators to the test as they struggle to balance high summer temperatures with a falling supply of electricity.
Continued buildout of solar generation will help meet the grid’s need for daytime electricity demand; however, expect California ISO (CAISO) and surrounding utilities to rely heavily on natural-gas-fired generation and to issue conservation orders and potentially implement rolling blackouts as the sun sets in the summer. In the long run, battery energy storage will help to alleviate some of this stress; however, even with nearly 10 GWh of energy storage expected to come online in the West in the first half of 2022, grid operators will be put under pressure.
Wind Breaks Records Again
The morning of May 8, 2021, might have been unremarkable for most, but in the Southwest Power Pool (SPP) ISO, which covers much of the mid-continent, new records were set. On that morning, wind generation reached nearly 80% of the total power mix in SPP, an all-time high. In the last 12 months, wind generation in the lower 48 states has made up 9.5% of the total generation mix. While that might seem small in the grand scheme of the U.S. generation mix, the impact is outsized in certain areas and certain times of the year.
The Panhandle Zone of ERCOT, SPP, and MISO all feel the disproportionate impacts of wind generation due to proximity to the U.S. wind belt. This leads to transmission congestion and weak, often negative, pricing as transmission expansions to move new electrons lag. In May 2021, SPP comprised 30 GW of the U.S. total wind farm fleet of 124 GW; by May of 2022, FactSet expects SPP’s wind generation capacity to increase by more than 20% to 36 GW.
More capacity will lead to more generation, new high-water marks, and weaker power pricing in 2022. Next year, expect offshore wind development in the Northeast to accelerate with material construction activities beginning on Avangrid and Copenhagen Infrastructure Partner’s 50/50 JV Vineyard Wind. In addition to Vineyard Wind, FactSet is tracking 30 other proposed East Coast offshore wind projects, totaling 22.9 GW of capacity. As these projects come to market, Northeast (PJM, ISONE, NYISO) power prices will feel the downward pressure from offshore wind generation from which they have so far been insulated.
Nuclear Power Gains Steam
In 2021, Exelon’s Illinois nuclear power plants were at the brink of closure until the Illinois legislature hesitantly stepped in to provide support. While the situation worked out in Exelon’s favor this time, much of the U.S. nuclear power fleet remains uneconomic and dependent on state subsidies to survive. However, states will realize to meet their lofty decarbonization goals, existing and new nuclear power plants must play a prominent role in the future generation mixes.
This will be hard to swallow given Southern Company’s experience with ongoing schedule and cost overruns at the expansion of Vogtle Nuclear Plant in Georgia. Initially expected to be completed in 2016, the units under construction will likely begin to be phased into service starting at the end of 2022 with a price tag more than double initial estimates. However, Vogtle may be the last large nuclear plant built in the U.S. as investors have pivoted to pilot projects for smaller, modular reactors.
FactSet is tracking 16 proposed modular units, totaling 1.2 GW, like X-Energy’s and TerraPower’s pilot projects that received government funding in 2020. Equinor is also increasing its stakes in its nuclear investment with its recent announcement of $1.8 billion in Commonwealth Fusion System’s series B to fund the world’s first commercially viable fusion reactor. While fusion reactors have been on the cusp for the last 50 years, the realization of a commercial fusion reactor would be a game changer in the struggle to decarbonize. While that will be years off, in 2022 expect smaller scale nuclear power investment announcements from some unexpected names in energy, as companies seek to secure their viability in an increasingly decarbonized world.
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