Without a doubt, regulatory compliance in the electricity-generating sector is getting more difficult. As if the Mercury and Air Toxics Standards weren’t challenging enough, along came the Clean Power Plan, which – until it was stayed by the Supreme Court – threw carbon dioxide into the regulated emission stew as well. The merits of these rules are being debated elsewhere. What matters here is that cost-effective compliance is not an option: it is a business objective. Addressing the continued operation of each and every coal unit has become paramount for coal-fired plant operators and entails: 1) evaluation of a company’s coal-fired assets, 2) identification of the best choice among three alternatives – the status quo, repowering, and demolition and redevelopment, and 3) timely and efficient implementation of the decision.
McCarter & English has focused on the repowering and demolition and redevelopment steps and offers legal services that meld cross-functional expertise, cost-conscious delivery and the right price. McCarter has assembled a team of legal subject matter experts with the skills and experience to address the myriad regulatory and contractual issues that will arise during such a project. The team approach assures that all of the bases are covered, and that they are covered more efficiently than would be possible with a staffing plan that involves multiple law firms.
The Coal Plant Demolition and Repowering Team includes lawyers who have experience in areas ranging from gas transmission to construction to site redevelopment, among others. The composition of the team is driven by a step-by-step assessment of the legal tasks involved in coal plant repowering or retirement projects. While no two projects are identical, the analytical process involves:
Stages and Skills
Decision to Shut Down – The decision to shut down a coal plant involves an assessment of numerous contractual and regulatory issues. The interests of off-take purchasers, co-owners, and state and federal regulatory authorities should be taken into account. Avoiding stranded asset costs and ensuring compliance with regulatory and contractual obligations is important. A shutdown may trigger obligations under the federal WARN Act and state analogs, and also may require or involve bargaining with affected unions over the effects of job losses on their members. Some states also have environmental responsibility laws that take effect when the announcement of a power plant shutdown is made.
Managing Shutdown Costs – Regulated utilities understand the importance of proper management of shutdown costs due to the potential for subsequent prudence reviews. But even non-regulated entities should exercise care to assure that such costs are minimized. Beyond ensuring that the most tax-efficient structures are used, utilities should look for ways to make the project actually add to the bottom line. Some actions, such as tax appeals based on diminished and arguable negative plant values, could precede plant shutdown by several years. In some cases, sales of valuable equipment (even if used) and the salvage value of plant materials can defray some portion of cleanup and demolition costs. However, the saturation of the used equipment market and the price instability of scrap mean that cash flow from equipment or scrap sales may cover only a small portion of those costs. Another consideration is the potential benefit of replacing retired capacity on-site with new generation (such as state-of-the-art combined cycle plants, utility-scale reciprocating engines, or wind and solar facilities) both to make use of existing infrastructure and to minimize interconnection-related costs.
Sequencing Repowering and Retirement – According to some estimates, more than 100 gigawatts of coal generation are targeted for retirement by 2020. If management is considering replacing the retired capacity with a new unit at the same site, one option is to proceed with the replacement project prior to shutting down the coal unit. In any case, before any contracts are let, inspections and due diligence are a given, on both the transactional and the environmental sides to identify the critical path to project completion. Project contracts must be structured with appropriate incentives and penalties to motivate contractors. If new or other existing generation will be operating on the site during demolition, the contracts also must assure that demolition does not interfere with ongoing operations. And, of course, the contracts between owner, general contractor, subcontractors and equipment providers need to be carefully drafted to ensure the project owner is protected.
Risk Control – As with all major projects, risks abound. In a coal plant demolition, particularly one undertaken in the vicinity of operating power plants, the risks multiply. Environmental contamination of the site is likely, and required remediation can affect project schedules and costs. Accordingly, securing remediation cost-cap and pollution legal liability insurance policies may be prudent. If a demolition-related event causes the forced outage of operating plants, damages could include both the opportunity cost of lost sales and potentially penalties under emerging pay-for-performance rules in the organized power markets. The most economical approach to managing these types of risks may well be insurance products, and, in some circumstances involving multiple units, it may be most cost-effective to use an owner- or contractor-controlled insurance program. Finally, indemnification and “additional insured” provisions will be parts of numerous contracts.
Post-Demolition – Depending on the location of the site, there may be economically attractive redevelopment opportunities. If redevelopment works, a decision on continued industrial use, or conversion to mixed use, is required. Either way, complex legal instruments will be needed for the transaction, as well as work in the zoning, permitting, licensing and leasing spaces. Even if a site will continue to be used as a generating facility, post-demolition there may be surplus land that could be redeveloped.