Brad Plumer at the Washington Post wrote yesterday that coal power generation in the U.S. is in sharp decline—but market forces, not environmental regulation, are driving the recent trend according to analysis in a new Brattle Group report. The primary reason is natural gas prices. RFF research generally bears this out—and indicates that it should lead to lower electricity prices and lower carbon emissions. There is one important difference: the Brattle report is primarily about how much coal generation is permanently retired, while this post on RFF's work is mostly about dispatch - that is, how much different plants actually run and generate electricity. But the overall story is similar.
According to the US Energy Information Administration, in March of this year U.S. coal electricity generation dropped to 34 percent of net electricity supply, its lowest level since EIA started collecting monthly data on the mix of fuels used to produce electricity in January of 1973. While electricity demand has declined somewhat due to the recession and improved efficiency, much of coal’s loss of market share has been made up by an increase in electricity production from natural gas. Last month, EIA reported that estimated shipments of natural gas to power plants were up by 25 percent through mid-August of this year, compared to the same period in 2011.
What is driving the shift from coal to natural gas? The most important factor is the development of horizontal drilling and hydraulic fracturing technology that can extract natural gas from shale deposits. The expanded use of this technology has dramatically increased supplies of natural gas and reduced its price, both absolutely and relative to the price of coal. A lot of gas-fired generating capacity was built up in the 1990s in response to the advent of greater competition in electricity markets that previously operated at less than full capacity, and this excess gas generation capacity is now being ramped up while coal plants are running less.
Looking forward into the future, RFF researchers find in a recent paper that reductions in expected future natural gas prices result in a ten percent reduction in electricity generation from coal through 2020. Moreover, this market-driven decline in coal is 5 or 6 times greater than the drop in coal use that is likely to be attributable to new EPA air regulations such as the Mercury and Air Toxics Standard, also known as MATS (note that the Brattle study includes these regulations in its estimate).
Coal’s loss may be electricity consumers’ gain. While regions of the country, such as the Ohio Valley and parts of the Southeast, that rely to a large extent on coal have typically been those regions with lower than average electricity prices, abundant natural gas is lowering electricity prices in other parts of the country and on average nationwide. In a recent issue brief, RFF researchers find that under recent predictions of natural gas prices in 2020, (35 percent lower than similar predictions in 2009), national average electricity price in 2020 is expected to be roughly 5.7 percent lower than prior forecasts predicted. In those parts of the country where electricity markets have been deregulated, which also tend to be regions that have historically been less dependent on coal, the effect is even more dramatic, with electricity prices predicted to be 9.6 percent lower than forecasts based on supply assumptions from prior to the recent gas boom.
The switch from coal to natural gas is also having beneficial effects on emissions of CO2 from the electric power industry that are expected to extend into the future. RFF researchers recently found that downward revisions in expected natural gas prices over the past few years in combination with slower rates of anticipate electricity demand growth reduce expected emissions of CO2 from the electricity sector by roughly 9 percent in 2020 and by even greater percentages in later years.
In short, RFF analysis parallels the Brattle Group predictions of a “secular” decline in coal power generation. As Plumer and Brattle note, EPA regulations on mercury and other pollutants that will be put in place in the near future could speed that trend, but it is happening anyway. Some companies, some regions, and some coal miners will undoubtedly lose out due to this trend. But both electricity consumers and those dependent on a stable climate—in other words, just about everyone—stand to benefit.
