EU Energy Policy Blog

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.

This entry was posted on Wednesday, November 7th, 2012 at 8:16 pm and is filed under Coal. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.