4 Reasons Coal Declines Even As Natural Gas Prices Rise: EIA

U.S. power plants began burning more coal in February as natural gas prices rose, but coal’s resurgence will not overcome its long-term decline, according to a report released today by the U.S. Energy Information Agency.

EIA analyzed the horse race between gas and coal under five scenarios reflecting variations in cost and supply of the two fuels. While coal is recovering ground in the short term, EIA found, coal loses in the long term as coal plants retire.

“In all five cases, coal-fired generating capacity in 2025 is below the 2011 total and remains lower through 2040, as retirements outpace new additions of coal-fired capacity,” according to “Competition between coal and natural gas in the electric power sector,” a newly released section of EIA’s 2013 Energy Outlook, which the agency releases in parts.

The Environmental Protection Agency recently cited cheap natural gas as one of the reasons for lower greenhouse-gas emissions in the United States—a 2.4 percent drop from 2010 to 2011. Gas prices declined as a result of increased supply from hydraulic fracturing, or fracking, and utilities responded by using more gas to generate electricity.

Natural gas emits about half as much CO2 as coal.

Gas prices had dropped from about $12 per million BTU in 2008 to about $2 in 2012, but the trend toward gas ended in February, Platts reported today, as gas rose past $4, and utilities began to burn more coal—a development that suggests greenhouse gas emissions could also rebound.

And according to EIA, coal remains the single largest energy source in the U.S. for the foreseeable future, though its slice of the pie shrinks precipitously: from 51 percent in 2003 to 42 percent in 2011, projected to 35 percent in 2040.

Meanwhile, under all five scenarios the EIA considered, the U.S. builds more gas-fired plants: ”The total capacity of all U.S. natural gas-fired power plants grows in each of the cases, but the levels vary depending on the relative fuel prices projected.”

EIA found varying contributions from nuclear and renewables, also notably dependent on natural-gas prices: “New nuclear capacity and renewable capacity are affected primarily by changes in natural gas prices,” the report says.

While price remains the primary factor in the short-term race between gas and coal, four other factors help gas displace coal in the long term, according to EIA:

1. Efficiency: The efficiency of power generation from gas means it competes with coal even when it costs 1.5 times as much. “When the ratio of natural gas prices to coal prices is approximately 1.5 or lower, a typical natural gas-fired combined-cycle plant has lower generating costs than a typical coal-fired plant.”
2. Competitiveness: “For new builds, natural gas and renewables generally are more competitive than coal.”
3. Flexibility: “In general, combined-cycle (gas) units are considered to be more flexible than steam turbines. They can ramp their output up and down more easily, and their start-up and shutdown procedures involve less time and expense.”
4. Regulation: “The interaction of fuel prices and environmental rules is a key factor in coal plant retirements. AEO2013 assumes that all coal-fired plants have flue gas desulfurization equipment (scrubbers) or dry sorbent injection systems installed by 2016 to comply with the Mercury and Air Toxics Standards. Higher coal prices, lower wholesale electricity prices (often tied to natural gas prices), and reduced use may make investment in such equipment uneconomical in some cases, resulting in plant retirements.”

EIA considers the effects of sulfur and mercury regulation on the competition between gas and coal, but it does not consider the impact of EPA’s proposed carbon regulations, which could be much greater:

EPA’s Proposed Carbon Pollution Standard for New Power Plants would require that new fossil fuel-fired power plants meet an output-based standard of 1,000 pounds of carbon dioxide per megawatthour of electricity generated. That standard would effectively prohibit the construction of new coal-fired power plants without carbon capture and storage. Currently, the EPA is evaluating comments and expects to issue a final rule in 2013. Because the rule is not yet final, it is not assumed to take effect in any of the AEO2013 cases.

 

Forbes