Coal is fading as the power generation fuel of choice in the U.S., but it's not just because of the EPA.
Coal-burning utilities and their industry partners have mightily protested new EPA regulations, due to go into effect last weekend, that would curb emissions of mercury, sulfur dioxides, nitrogen oxides, and other metallic toxics such as arsenic from power plants. A federal appeals court delayed enforcement of the regulations on December 30 after hearing a challenge brought by power-plant operators and utilities, six states, the National Mining Association and the IBEW electrical union. Their arguments hardly need recitation: The regulations are expensive and "draconian." They're job-killing. They'll raise the price of grid power. The EPA is overstepping its authority. Yadda yadda yadda.
Having had a long look at the data, however, I think the industry doth protest too much.
There is no doubt that several decades ago, clean air regulations caused power generation to begin shifting away from coal and toward natural gas. But in recent years, the most significant pressure by far is price.
The chief reason for this was the explosion of shale gas production, which created a gas glut and drove the price of gas to under $3 per million BTU — an insanely low price, as my friend Gregor Macdonald showed this week. Natural gas now sells for 83 percent less than oil for the same amount of energy, an historically unheard-of discount. Even more remarkably, it's now actually cheaper than low-sulfur bituminous coal from Central Appalachia. Only coal from the low-sulfur Powder River Basin of Wyoming is cheaper, at $0.71 per million BTU. Its price advantage has gradually pushed coals from the East Coast out of the market.
A detailed 2010 report on Central Applachian coal by researchers Rory McIlmoil and Evan Hansen showed that PRB coal began offsetting high-sulfur coals in the 1980s as clean air regulations favored lower sulfur dioxide emissions, but then began to offset low-sulfur coal from Central Appalachia as well by virtue of price:
Source: "The Decline of Central Appalachian Coal and the Need for Economic Diversification," McIlmoil, Hansen, 2010
Central Appalachian coal has ceased to be competitive on price largely because those mining operations are much older. As with oil, we burned the best, cheapest, and most abundant coal deposits first, and the Appalachian mountains have simply become mined-out. The best coal reserves are depleted, and producers now must move on to thinner, less productive, more geologically challenging deposits with lower energy content. Overall, domestic U.S. coal now has 20 percent less energy per kilogram than it did in 1949, and the quality is still declining.
Shifting from underground mining to surface mining (mountaintop removal) improved productivity through the 1990s, the researchers note, until it maxed out in 2000. At that point, labor productivity fell by 25 percent, and the price of Central Appalachian coal began to rise. By 2008 it had doubled and lost its price competitiveness:
Central Appalachian coal production peaked in 1997 at 290 million tons, then fell 20 percent to 235 million tons by 2008. On current trends, the researchers estimate, coal production from the region will fall another 58 percent by 2035 to 99 million tons.
One coal industry response to this long decline was to optimize its supply chain, reducing inventories and moving to just-in-time shipping. But as we discovered in 2008, that came with a hidden price: The spare production capacity of coal fell to a thin enough margin that it couldn't respond adequately to sharply rising demand from Asia, and invited opportunistic speculators. Now we have entered a new era of structurally higher prices for Central Appalachian coal.
This has added some upward pressure on the average price that utilities have to pay for coal, which rose from $1.25 per million BTU in 1998 to $2.41 in 2011. At the same time, the utility price for natural gas exploded from $2.38 in 1998 to $8.32 per million BTU in 2005 as the depletion of conventional resources began to cut into supply. Then the arrival of significant volumes of shale gas around 2006 started to bring prices back down again. The explosion of commodity prices in 2008 interrupted the new trend, but then it resumed, taking gas prices gradually down to a 2011 average of $5.14 per million BTU through September (the latest month the EIA included in its 2011 average calculation), then sharply lower after that.
[Important note: Although the Henry Hub spot price of natural gas is lower than the price paid for by gas by utility operators, I have added the monthly spot data to the end of the operator price series offered by the EIA here simply to illustrate how quickly the price of gas has fallen over the past four months, because the EIA doesn't offer monthly operator price data for those months. The daily spot price of gas fell from $4.18 on September 1, 2011 to $2.96 on January 4, 2012 — an astonishing 29 percent decline. The EIA's 2011 average $5.14 cost to operators from January through September compares to a daily Henry Hub average of $4.22 over the same period.]
Now let's think about the two fuels like a utility operator would. In 1998, the cost of gas for electric utilities was 1.9 times higher than coal. That ratio rose to 5.4 in 2005. It now stands at a mere 1.2, making gas just slightly more expensive than coal for power generation.
That calculus is precisely why Michigan’s Consumers Energy cancelled its plans for a $2 billion, 830-megawatt coal plant in December. It made the decision, a company spokesman said, because the economics didn't pencil out — not because it was cowering in fear before regulatory uncertainty.
To meet the requirements of the new EPA regulations, operators of legacy coal-fired plants would either have to retrofit them with scrubbers, or to switch to natural gas. (Burning natural gas in a power plant generates less than a third as much nitrogen oxide emissions, and about half the carbon dioxide emissions, as burning coal. Sulfur dioxide and mercury compound emissions from natural gas are negligible.) The estimated $11 billion price tag and three-year deadline to retrofit the nation's coal-fired plants with scrubbers, while not hugely burdensome, might just be enough to persuade some operators to throw in the towel on coal.
Coal plants also face retrofit or replacement due to the need for storage and handling of coal ash, which fell under tighter restrictions after the catastrophic collapse of the Tennessee Valley Authority Kingston Fossil Plant’s coal ash pond in December 2008, a disaster with a cleanup cost of over $1 billion.
Yet another factor against coal plants is a potential requirement to switch to closed-loop systems for cooling water, to reduce their consumption of fresh water and their discharge of heated water into the environment. The states of New York and California have already issued rules requiring all power plants to switch to closed-loop systems, and the EPA is considering a similar national regulation. The Electric Power Research Institute estimates that 252 gigawatts (GW) of existing fossil fuel power generation capacity would be affected by such a rule, of which I surmise at least half would be coal plants.
The age of our coal-fired power plants is a final, key factor.
Over half of the nation’s generating capacity comes from plants that are at least 30 years old. Nearly three-quarters of our coal-fired capacity, contributing 46 percent of our electricity supply, is at least 30 years old. Many of the plants are using outdated, inefficient technology. Some need to be retired immediately, and within 20 years nearly all of them will need to be replaced.
For plants that are close to retirement age, the decision is easy. The investment horizon of a new power plant is at least 35 years. In its Annual Energy Outlook 2011 report, the EIA estimated that the capital costs of building new coal and nuclear power plants had risen 25 to 37 percent from 2010, while the capital cost of combined-cycle natural gas plants had remained steady. Who would build a new coal plant in an environment of ever-tightening emissions limits, rising capital costs, rising coal prices, falling coal supply, rapidly falling gas prices and rapidly increasing gas supply? Particularly when carbon capture and sequestration technology has still not been proved to be commercially viable?
Transition already under way
The fact is that the transition from coal- to gas-fired plants been under way for decades, and has accelerated since coal prices started rising in 2004:
And for at least the next several years, gas will continue to be a preferred fuel for new plants:
[Note: The EIA's most recent available data for planned capacity changes is from the Electric Power Annual 2010 report, in which the 2011 data is "planned."]
In its AEO 2011, the EIA offered multiple scenarios for how electricity generation might evolve over time, depending on the price of gas, various potential regulations, and how quickly plant owners might expect to recover their capital investment. Without belaboring the details of these scenarios, I'll just present one of those charts with the comment that in my view, the last column in this chart is the more likely of these scenarios. Under that scenario 72 GW, or 23 percent of the nation's 313 GW of coal-fired plant capacity, will be retired.
Various industry organizations have recently weighed in with their own estimates of coal plant retirements, and evidence of the transition to gas.
The Edison Electric Institute, an association of public electric companies, estimates that 48 GW of coal-fired capacity will be retired from 2010 to 2022.
A 559-page report issued in November 2011 by the North American Electricity Reliability Corporation (NERC), an independent, non-profit regulatory authority charged with evaluating and monitoring the reliability of the North American grid, suggests that net coal capacity will decline over at least the next 10 years. They cite 326 GW of total coal generation capacity in 2011, but project only 8 GW of it to be retired by 2021. In the same report, however, they identify 89 GW of coal-fired capacity that will need to install flue gas desulfurization units by 2015 to comply with the new EPA rules, and note that 29 GW of it is already designated for retirement, leaving 60 GW of coal capacity with an undecided fate. By 2021, they see 45 GW of planned new gas capacity, plus an additional 48 GW of "conceptual" capacity (which they define as "resources with less certainty," according to a "confidence factor"). Noting that their last four assessments successively reduced their expectations for coal generation while increasing their outlooks for gas, they observed that "the evolution from coal to gas is evident," and offered a chart showing gas and renewables dominating future capacity additions with net declines in coal capacity every year:
While the news is almost universally bad for the coal-fired sector, the outlook for gas is excellent. Gas producers, manufacturers of modern, high-efficiency gas turbines, and gas pipeline providers are all looking at a decade of substantial growth. NERC reckons that replacing the 60 GW of coal-fired capacity whose fate is yet to be decided with equivalent gas-fired capacity would require an additional 1,200 miles of gas pipelines.
So in reply to the coal-fired power sector's bleating about regulatory uncertainty, I say: The only uncertainty is how quickly, and how much, the noose tightens around your neck. While I have questioned both the economics of shale gas production and the claims about its reserves, there is no arguing about price. As long as the shale gas phenomenon can bring gas to market for under $4 per million BTU, the economics are tilting in its favor. The cost of renewables will continue to drop, while the cost of coal will continue to rise. That's the hard reality of price, and it has nothing to do with regulatory uncertainty.
And even though regulatory uncertainty does pose a problem for coal plant owners, those regulations can only be good news for the health of the public and the environment. It's cynical and shameful to pretend to a principled stand against overweening federal regulation when you're really just trying to squeeze a little more life out of filthy old plants that are destined for retirement anyway. The public has gotten wise to your game, and your onslaught of glossy prime-time ads isn't convincing anybody that you're clean or green. Concerns about killing acid rains, billions of dollars in health destruction, and general environmental contamination have begun to weigh more heavily than adding a fraction of a penny to the cost of a kilowatt-hour. The public now knows that the price of power from renewables and gas is on the verge of being competitive with coal, and that if no externalities (like carbon emissions) are allowed into the calculation, coal is already a hands-down loser. Your "jobs, jobs, jobs" mantra is wearing thin. We don't just need any old jobs, but the right jobs, in order to become a more healthy, safe and sustainable society.