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Coal Losing Ground To Cheap Gas

November 7th, 2012 by Fereidoon Sioshansi, EEnergy Informer

With the November’s election around the corner, everything in Washington and beyond is viewed from the highly polarized and politicized perspective with both parties trying to milk the issues for all they can. The recent demise of coal is no exception. Coal, long considered the fuel of choice for power generation in the US – as in many other countries – has been gradually losing market share, mostly to natural gas. The coal’s downward trend, however, has accelerated in the past couple of years with gas prices at historically low levels. Although the figures fluctuate seasonally and depending on temperature and load, in the past few months, power generation from natural gas has been running at near parity with coal, something few observers could have imagined only a decade ago.

There are multiple explanations for this, chiefly the relative cost advantage of natural gas at current low prices but also environmental benefits including the fact that natural gas emits roughly half as much carbon into the atmosphere as coal for an equivalent unit of generation.

Figure 1

According to the Energy Information Administration’s latest data, natural gas power generation rose 34% between January and June 2012 relative to same period in 2011; coal generation declined 20% in the same period (see figure 2). Clearly natural gas is gaining ground at the expense of coal. Tightening regulations on coal is a factor, but natural gas’ cost advantage speaks volumes.

The Republicans, who – broadly speaking – are not fond of big government or regulation, especially environmental regulation, blame the Obama Administration, especially the Environmental Protection Agency (EPA), for coal’s demise. An analysis by the American Coalition for Clean Coal Electricity – you can guess the group’s orientation – concluded that 31 GW of coal plants, roughly 10% of US installed capacity, may be shut down as a result of tightening regulations and changing economics of electricity generation. It is a perfect subject for TV sound bites and negative TV attacks on the incumbent administration but mostly untrue, as are many other messages propagated for political gain during the election season.

True, the EPA has been gradually tightening regulations on coal-fired plants, and these will, in time, make coal plants more expensive to build and operate in the future. For example, a pending new requirement, expected to go into effect in March 2013 will put new restrictions on mercury emissions – something that is equally bad for humans whether they are Republican or Democrat. Another EPA proposal expected to take effect in April 2013, will require new coal fired plants built after deadline to be equipped with carbon capture and storage (CCS) capabilities, which will make them significantly more expensive to build and operate.

The fate of these EPA proposals – whether they in fact will take effect, are postponed, watered down or scrapped – is anybody’s guess. But it is fair to say that the likelihood of more stringent regulations is far less likely under a Republican Administration than a Democratic one if you go by the rhetoric of the two parties.

Figure 2

What the EPA proposals have done, however, is to introduce a new element of uncertainty on future of coal. Many developers and investors are less likely to want to build new coal fired units not knowing if, when and how new restrictions may take effect and what their ultimate cost implications may be.

The April 2013 deadline, in particular, has prompted a number of entities with plans to build coal-fired plants to try and start construction prior to the deadline. Any plants built after April 2013 may be subject to new restrictions, making them uneconomic, especially compared to low cost natural gas, currently selling around $2.80 per million BTUs.

While estimates vary, many experts believe that building new coal plants will not make economic sense – with or without EPA regulations – so long as natural gas prices are below $4 per million BTUs. In other words, natural gas prices have to rise to roughly twice today’s level for coal to become economic.

One can, of course, speculate about how long current low natural gas prices will last. If you are of the opinion that within a few years, natural gas will trade above $4 per million BTUs, and you also assume that EPA’s proposed rules on mercury, carbon emissions, fly ash, etc., etc., will be shelved, then building new coal fired plants ahead of April 2013 deadline may be a good bet.

Viewed from a longer-term perspective, coal’s future in a carbon-constrained world, especially in developed countries, does not look overly promising. As noted by Sierra Club’s Sanjay Narayan, “At some point, (investors & generating companies) have to accommodate the world that is changing around them.”

F.P. Shioshansi

This post is extracted from EEnergy Informer, October 2012 issue.

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2 Responses to “Coal Losing Ground To Cheap Gas”

  1. Jamie Tunnicliffe Says:

    The EIA’s short term energy outlook (Nov 12) suggests it expects to see some reversal of this trend next year. Here are two quotes:
    “EIA expects that prices for natural gas delivered to electric generators during 2013 will average 22 percent higher than during 2012, while the average cost of coal is just over 1 percent higher. The projected higher price of natural gas relative to coal contributes to a decline in the share of total generation fueled by natural gas 27.2 percent next year and an increase in the coal share to 40.1 percent.”

    “EIA projects power sector coal consumption to grow by 6 percent in 2013 as higher natural gas prices lead to a reduction in natural gas‐fired generation.”

    http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf

  2. Matthieu Blanchet, Mines ParisTech Says:

    THE USA WILL CONTINUE TO EXPORT GAS AND COAL TO EUROPE

    F.P. Sioshansi described last year how gas was replacing coal as the first source of electrical power in the USA. He also pointed out the political uncertainties on environmental regulations – he was writing just before the presidential elections. Six months later, what is the situation in the USA, and what can we expect about exportations to Europe?

    President Obama has been elected, and has issued several strict rules on coal plants, which makes the existing plants slightly more costly to run and makes the future ones much more expensive to build and operate. In a context of cheap gas, this is bad news for the American coal industry – and probably good news for the environment and to coal rivals: gas, wind and solar.
    Indeed, since 2010, about 150 coal plants either have been retired or it’s been announced they will be retired soon (according to NPR).

    However, according to the last EIA projections, coal consumption for power plants is expected to rise 52.2 million short tons (MMst) in 2013 and 9.2 MMst in 2014, recovering 40% of what it had lost since 2010. It seems that the current increase of natural gas prices is enough to make coal be profitable again. This trend is expected to continue: the EIA expects the natural gas-coal spread will increase from $1.69/MBtu at the end of 2012, up to $2.31/MBtu at the end of 2014. Another reason may be the better visibility on environmental regulations on both gas and coal. More, the economy is recovering from the crisis, so energy demand is growing. Last, the current variations of gas prices make gas plants risky – so investors may think it is not so reliable to replace coal plants by gas ones.

    On the long-term, coal will actually continue to be the largest source of U.S. electricity generation up until 2040, according to the AOE 2013 report. Its share is supposed to slightly decrease from 42% in 2011 down to 35% in 2040. The installed capacity of coal-fired plants is actually expected to be stable, while most of the new generating capacities will come from gas and green energies. When needing to make a choice, investors would prefer gas plants because they have a lower CAPEX and supposedly comparable OPEX; or they would choose green energies because the demand is growing fast.

    Thus, on both short and long terms, coal and gas will continue to be produced plentifully in the USA, driven by a solid domestic market. The abundance of shale gas production make both of them remarkably cheap in comparison with the rest of the world: natural gas is sold twice higher in Europe than it is in the USA, and about three times higher in Japan. Similarly, even with the cost of maritime transportation, it is profitable to sell American coal to Europe (exports to Europe went 60% up between 2010 and 2011).

    However, massive coal and LNG exportations to the rest of the world are still subject to controversy inside America. Strategic, social and environmental reasons as well may balance their economic profitability. Noteworthy is the fact that American industries are worried that growing exports would mean an increase in natural gas prices inside America – but studies (e.g. Baker Institute, August 2012) show that at least 80% of the foreign demand could easily be met by new drillings in shale gas fields. Thus internal prices should not increase by more than 1 USD/MMBTU if exportations were massive. President Obama will decide soon whether he gives permits for converting several LNG-import facilities to export facilities – one permit has already been given, but 19 are pending. The objective of consistent export volumes by 2020 may not be reached as fast as planned.

    Conclusion
    In a nutshell, coal will not lose the ground to gas as fast as expected, even if building new coal-fired power plants may now be unwise. Gas production will continue to increase with the objective of satisfying the European and Asian demand. As a result for Europe, coal and growing quantities of gas are expected to come on the EU market for the next 10 years – this is a mighty asset to renegotiate the Russian gas contracts and a perspective for the European crisis-hit countries to master their energy costs.

    Bibliography:
    – Sioshansi, Fereidoon. Coal Losing Ground To Cheap Gas, Energy Policy Blog, EEnergy Informer, Nov 7th, 2012
    – Jekins, Jesse. Energy Facts: Is the U.S. Shift from Coal to Natural Gas Stalling Out?, The Energy Collective, 22nd March, 2013
    – Darmstadter, Joel. The Controversy over US Coal and Natural Gas Exports, Resources for the Future, March 2013 issue
    – Annual Energy Outlook 2013, EIA
    – Medlock, Kenneth, LNG exports: truth and consequences, Rice University, August 10th, 2012
    – Bloomberg, US should export natural gas, not coal, May 9th, 2013
    – Joyce, Christopher. Natural Gas Dethrones King Coal As Power Companies Look To Future, NPR, March 1st, 2013
    – McKinley and Griffith, Rep. Obama coal regulations crippling communities, The Washington Times, January 18th, 2013

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