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Despite New Federal Support, Coal Not Likely to Gain Edge on Gas

April 26, 2017 | By Annalisa Kraft

In the last few years, natural gas has won the power battle against coal, steadily gaining market share and in 2016 surpassing coal use in the power sector for the first time. But just as gas seemed ready to permanently stake its leadership in the power sector, Donald Trump was elected on an energy platform that included reviving the U.S. coal industry.

President Trump has followed through on his campaign promises to the coal industry, most prominently by signing an Executive Order on March 28 that would initiate a review of the Clean Power Plan (CPP) that was widely seen as the death knell of the coal industry. In signing the executive order, Trump told coal miners assembled at EPA’s headquarters, “You know what this means, guys…you’re going back to work.”

But bringing back the coal industry isn’t as simple as canceling the CPP. In this issue of “Get the Point,” we look at the key trends affecting the competition between gas and coal. The bottom line is that gas still has many near-term and long-term advantages over coal, though the competitive edge for gas could be tightened by both regulatory and market forces.

Coal loses ‘steam’

Coal increasingly looks like a rearview mirror phenomenon. U.S. power companies shut down almost 13,000 MW of coal plants in 2016 and another 8,000 MW are on track for closure or gas conversion this year, reported EIA and Thomson Reuters. At least 40 closings or conversions have been announced for the next four years.

Even in coal country itself, coal-fired units are being retired: two Owensboro Municipal Utilities generators are expected to shutter in Owensboro, Ky. by 2019. In nearby Dayton, Ohio, two Dayton Power and Light coal-fired plants will close by 2019.

Across the nation, coal country closings are to be joined by the likes of the NVEnergy Reid Gardner generation station near Las Vegas. “The full closure of the facility was completed nine months ahead of schedule and represents a significant step in achieving a less carbon intense energy future consistent with the policy objectives of Nevada,” the company said in March.

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But the Trump administration still keeps hoping for a Hail Mary pass or two. Example: The Navajo Generating Station, in Page, Ariz., the largest in the Western states (2,250 MW), which announced in February it would close at the end of 2018. But April 13, Interior Department Secretary Ryan Zinke met with Native American groups to figure out a way to keep it operating.

On the same day, Trump-appointed EPA Administrator Scott Pruitt visited Pennsylvania coal country to begin a dialogue on the Trump "Back to Basics" energy agenda.

However, those efforts don’t change the market benefits of using cheaper natural gas to produce power. PointLogic Energy analyst Robert Applegate summed up the current thinking by observing, “Utilities with existing coal plants AND access to cheap coal have no incentive to shutter those plants, but no one is building a new coal power plant in the U.S. Some utilities are still converting coal plants to gas and many are still building new gas power plants.

“Just due to the fact that many of the gas plants are newer, they are more efficient, and cheaper to operate, even ignoring the price of natural gas. Coal plants are older and more costly to run. Why use a typewriter when you can use a laptop?” said Applegate.

Gas overtakes coal

The rise of gas in the power sector isn’t a new phenomenon. Since the shale gas revolution created vast amounts of new gas production, power has been an obvious market opportunity. That’s why gas provided almost 34% of power generation in 2016 and coal provided 30.4%. As recently as 2008, coal provided 49% of power generation, and gas was at about 22% (see graph).

US Powere Generation by Fuel Percent of Total

 

In a report released in April, “Can Coal Make a Comeback?” Columbia University Center on Global Energy Policy quantified the impact that low natural gas prices have had on the coal industry since 2008 and can be expected to have in the future.

“Increased competition from cheap natural gas is responsible for 49 percent of the decline in domestic U.S. coal consumption,” the report said. “Lower-than-expected demand is responsible for 26 percent, and the growth in renewable energy is responsible for 18 percent. Environmental regulations have played a role in the switch from coal to natural gas and renewables in U.S. electricity supply by accelerating coal plant retirements, but were a significantly smaller factor than recent natural gas and renewable energy cost reductions.”

Shale gas has been the key, and it’s created irresistible incentives for power producers. “In 2008, the average U.S. power plant paid $10 per thousand cubic feet (tcf) for delivered natural gas (in real 2016 dollars). In 2016 they paid $3, a 71 percent decrease,” said the report (see graph).

Delivered Natural Gas Prices for Power Generation

Coal prices declined 8% during the same time period, thus becoming much less competitive.

Utility sentiment on coal

Executives at utility companies can plainly see the numbers and have decided that coal plants have to be retired and natural gas plants built in their place. Utility Dive released on March 29 the results of its 2017 survey of utility executives, which found 52% believe their use of coal will “decrease significantly” over the next 10 years, and only 2% saw their use of coal would “increase significantly.”

Of the 600 respondents, 42% see the use of natural gas will “increase moderately.” Another 22% believe the use of gas will “increase significantly," and only 2% believe the use of gas will “decrease significantly.”

“Most utility executives do not expect the election of Donald Trump to change the outlook for generation resources in their service areas. The lone exception was coal — nearly half of respondents indicated they now have a ‘more positive outlook’ on the future of coal after the election,” wrote Utility Dive. But even that positive outlook came with a caveat – as executives said that they were more optimistic about coal use, but not at their own companies.

U.S. utility executives can also read the numbers from EIA. U.S. coal consumption fell to 730 million short tons in 2016, the third consecutive year of declining coal consumption. Coal consumption decreased in the electric power sector by 61 million short tons (8%), while industrial sector coal consumption fell by 6 million short tons (11%).

U.S. Coal Consumption

EIA's most recent Short Term Energy Outlook noted that the year 2017 could mark a small rebound for coal -- though not necessarily due to the president's actions. “EIA expects the share of U.S. total utility-scale electricity generation from natural gas to fall from an average of 34% in 2016 to 32% in both 2017 and 2018 as a result of higher expected natural gas prices. Coal's forecast generation share rises from 30% in 2016 to 31% in both 2017 and 2018,” EIA said.

Gas analysts agree, but the emphasize it’s a short-term issue. "Coal looks poised to benefit from the temporary reduction in natural gas production that has occurred as a result of the reduced drilling activity driven by the overall commodity price collapse in 2015. We see that 2017 could be a positive year for coal, but it is highly unlikely that this is a trend," said PointLogic Energy Vice President Charles Nevle.

“With rig counts rising rapidly, significant pipeline infrastructure being added and increasing efficiencies in gas and oil producer economics, the outlook for 2018 looks like a return to a declining trend for coal-fired power generation,” Nevle said.

Using EIA’s 2017 Annual Energy Outlook forecast for natural gas prices, Columbia University Center looked at how a change in gas prices could affect coal demand. EIA’s base case is for Henry Hub gas to average $3.40/MMBtu in 2018, $4.51/MMBtu in 2020 and 2025, and $5.00/MMBtu in 2030 (in real 2016 U.S. dollars). At these prices, coal consumption between 2016 and 2020 would rise by to about 750 million tons, a gain of about 3%, even if President Obama’s policies were left untouched. Then after 2020, coal consumption would fall as the Clean Power Plan (CPP) is implemented, they said.

To compare, the researchers also modeled coal consumption if natural gas prices were lower than EIA’s estimates ($3.12/MMBtu 2018, $3.52 in 2020, $3.41 in 2025 and $3.64 in 2030) and higher than EIA’s estimates ($3.68/MMBtu in 2018, $5.39 in 2020, $7.12 in 2025, and $7.95 in 2030).

As the graph below shows, they found that the range of coal demand would be much more sensitive to gas price forecasts than it would be to either the retention of Obama’s policies or the implementation of the full range of President Trump’s pro-coal policies. Trump’s policies, including rolling back the CPP, could increase coal demand by about 111 million tons annually, or 16%. But if gas prices reach the high end of the range that was studied, coal demand would increase by about 180 million tons annually.

US Coal Consumption under Obama's policies and Trump's Proposals

Bankruptcies

Presently, it doesn’t appear as if investors are expecting the high-gas-price scenario. Investors learned the hard way that the coal industry overreached late in the last decade by investing as if coal demand worldwide would continue to grow. In particular, they were counting on major demand growth from China (for both power and metallurgical uses) that just didn’t happen.

“The four largest U.S. miners by output, Peabody Energy, Arch Coal, Cloud Peak Energy and Alpha Natural Resources, which account for nearly half of U.S. production were worth a combined $34 billion at their peak in 2011. Today they are worth $150 million,” noted consulting firm Rhodium Group.

Peabody Energy just emerged from Chapter 11 protection in early April. Arch and Alpha filed for bankruptcy protection in 2016.

The negative outlook for coal is reflected in assessments of coal-fired plants, too. Just on April 24, ratings firm Moody’s Assistant Vice President/Analyst Jennifer Chang issued a note on the PJM market, saying, "Since their original financings, merchant coal-fired projects in PJM have made little or no incremental debt repayments aside from mandatory requirements. Given forward power price curves and capacity additions, this is unlikely to change in the near future.”

The Business Council for Sustainable Energy has identified the PJM Interconnection, a large and high-volume region that includes much of the Mid-Atlantic and Midwestern states, as the next target for coal-to-gas switching. “Power burn in PJM has the greatest sensitivity to gas prices and also faces lower gas prices than Henry Hub. The coal-to-gas switch potential is, therefore, the strongest in this region,” the Council said in a report in March.

Moody’s sees the PJM as pivotal, too, as it noted that some coal plants now are operating at below 60% capacity, down from 80% only four or five years ago. “The upcoming PJM Base Residual Auction in May is an important data point that will influence future refinancing prospects for merchant power plants in the region, and could accelerate the early retirement of less efficient coal-fired generation," Chang wrote.

Moody’s said these developments are taking a toll on financing coal plants. At the same time investors are thinking about coal plants, they also can consider 20 GW of new gas-fired generation, to the tune of $3 billion, that’s on the table. “Moody's expects an additional $8-10 billion of debt to come to market, which could crowd out refinancing prospects for existing merchant coal projects. Market dynamics have challenged the competitiveness of coal-fired generation as leverage remains high and debt repayments loom for certain projects,” it said 

According to one study conducted a few years ago by the Union of Concerned Scientists (UCS), 153 to 353 coal-fired electric utility generating units (from a national total of 1,169 at the time) were "ripe for retirement" because the environmental technology would be economically uncompetitive to install. These were on top of 288 plants already scheduled for closure at the time.

"For all of the ripe-for-retirement generators identified in this report, the power they produce—after being upgraded with modern pollution controls—is more costly than electricity generated from existing natural gas power plants, and many are more expensive than wind power," UCS said.

And here's the biggest takeaway from that UCS report. "Our analysis shows that many of these ripe-for-retirement units may already be uneconomic even before considering the cost of pollution controls [italics added]. Indeed, even without considering the cost of needed pollution controls, 23.4 GW are already more expensive to operate than existing natural gas plants,” it said.

Contrarian on coal

However, these dour views of the future of coal are not shared by everyone. Law firm Husch Blackwell LLP issued a client note on April 20 saying the administration's policies may already have some traction as several mine sites, including in West Va., that were formerly dormant, are staffing full shifts.

The firm pointed to a February Congressional Review Act measure passed and signed by the president to overturn the Stream Protection Rule (a measure regulating coal activity debris disposal) as potentially creating thousands of coal jobs.

The administration's opening up of federal leases and EPA action on methane rules may help the coal industry, said Husch Blackwell.

However, the firm didn't predict a long-term rise in coal demand or production."While the president may be scoring political points in coal country, as a practical matter that’s really not where energy sector job growth will come from in the next few years," it said.

That growth will be in renewables, most observers agree. “In states like North Carolina, South Carolina, Montana and Oregon, a decades-old law — the Public Utility Regulatory Policies Act, aka 'PURPA' — has effectively forced big utilities to buy power from smaller renewable companies as long as they are cost competitive with fossil fuels,” Husch Blackwell said.

Yet, renewables present an opportunity for gas that they do not for coal. "With the growth in renewables, coal cannot be used to back up the power grid when the sun isn’t shining or the wind isn’t blowing. That responsibility falls on gas. Gas plants can ramp up and down faster than coal and can back up renewables as they become a greater portion of the power stack,” said PointLogic’s Applegate.

Big picture 

Weighing the trends – market and political – PointLogic sees a potential for a small rebound in coal consumption this summer, as higher gas prices could encourage some gas-to-coal switching. But the bigger trend is clear: coal-fired power will continue to decline, and gas will have an opportunity to compete with renewables to replace it.

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