Will Natural Gas Dethrone Coal in US Power Generation?

Will Natural Gas Dethrone Coal in US Power Generation?

30th October 2014

Just ten years ago this question would have been labeled as outlandish, as few could imagine low cost US coal could be replaced with then scarce and expensive natural gas, despite the environmental benefits of the latter.  In 2004 coal fueled over 50% of the US power generation, with natural gas supplying 18%.  By 2012 the share had shifted to 37% for coal and 30% for natural gas with total power use practically flat over the period.  With economic rebound after the slump in 2009 total electricity use has shown moderate growth allowing for some recovery in coal-fired generation but natural gas seems well established with a 30% share. 

Key Facts

  • EPA Rule targets a 30% reduction in CO2 emissions from US power generation (from 2005 levels) by 2030
  • Actual reduction from 2012 levels of 6.5 billion tons of CO2 would be 15%, or about 700 million tons 
  • EPA proposes individual targets and guidelines for each state 
  • Full implementation is not expected until 2017-2018; EPA will issue a final rule in June 2015; each state will have one year to submit their plans, or request an extension
  • EPA models project the 2030 power generation fuelled with coal will be 20% lower at 1.2 million GWh vs. 1.5 in 2012 (Figure 4). During the same period, gas-fired generation will grow 13% to 1.4 million GWh in 2030 from 1.2 in 2012   
  • Coal will still fuel 30% of US power in 2030 (from ~40% today)
  • EPA projects that in 2020 up to 20% of coal-fired capacity would be too old and uneconomic to maintain,  if all this aging fleet were retired and replaced with lower-emission generation, the CO2 targets set for 2030 would be close at hand 

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Figure 1

Figure 1.  US power generation by energy source

Following the Shale Revolution in the US, natural gas is now the fuel of choice because of price and environmental benefits over coal with natural gas combined-cycle power plants, emitting into the atmosphere 40% of the CO2 per power unit vs. coal.  Therefore the question today is not whether but how soon will natural gas overtake coal in the US power generation mix, in particular if supported by environmental policy from the US administration.

On June 2, 2014 the US Environmental Protection Agency (EPA) unveiled the details of a proposed regulation (“EPA Rule”) to reduce US emissions of carbon dioxide (CO2) from electricity generation by 30% (from 2005 levels) by 2030.  

The US is second only to China in terms of carbon emissions, with the EU following close behind in third place (Carbon Dioxide Information Analysis Center (CDIAC), Global Carbon Project).  These three regions account for almost half of the 35 billion tons of CO2 sent into the atmosphere worldwide each year (Figure 2).

Figure 2

Figure 2. Global CO2 emissions

The combustion of fossil fuels in the US is responsible for over 90% of the country’s 6.5 billion tons of CO2 emissions, with the balance coming from agriculture.  Generating electricity with fossil fuels is a significant source with 2.0 billion tons of CO2 in 2012 (Figure 3), representing about a third of the country’s total emissions.  

Figure 3

Figure 3. CO2 emissions from fossil fuel combustion by sector and fuel type

Naturally, the expectation is that the EPA Rule will significantly impact the coal-fired power plants currently in operation, or in the planning stage, and that natural gas will replace coal as the fuel of choice for power generation. However, how significant will the impact be on coal, and could this be an opportunity to accelerate utilisation of the substantial natural gas resources that have emerged in the US in recent years?

By choosing 2005 as the baseline for measuring the target reductions, the US is already nearly halfway to the 2030 goal, as emissions from fossil-fuel power generation have been on the decline as a result of the economic recession and switching to competitive low-cost natural gas that has already occurred. Consequently, while in the most optimistic scenario forecast by the EPA, emissions from power generation in 2030 will be 1.7 billion tons vs. 2.4 in 2005 (the 30% reduction target it is seeking), it should be noted that this is only 15% lower than the 2.0 billion tons emitted in 2012.

The EPA used its models to set the emissions targets and forecast the impact on US electricity demand, the power generation mix by energy source and calculating the corresponding CO2 emissions. The model generated a Base Case, assuming the absence of the proposed rule (no EPA action) and scenarios for the speed of implementation of the EPA Rule.

Figure 4 presents the historical evolution on the generation mix, the forecasts according to the EPA Base Case and the most optimistic case where plans to comply with the EPA Rule are implemented rapidly (EPA model results -fast attainment- published in its “Regulatory Impact Analysis” for the proposed regulation, June 2014).  

Figure 4

Figure 4. US CO2 emissions from electricity generation

Under this fast implementation scenario, the EPA estimates by 2030 power generation fuelled with coal will be 20% lower at 1.2 million GWh vs. 1.5 in 2012. During the same period, gas-fired generation will grow 13% to 1.4 million GWh in 2030 from 1.2 in 2012 (Figure 5).

Figure 5

Figure 5. Impact of EPA Rule on US power generation fuel mix forecast

According to the EPA, by 2020 up to 20% of the coal-fired generation capacity would be too old and uneconomic to maintain.  If retired, this fleet would withdraw 0.3 million GWh of coal generation from the mix and if replaced with natural gas combined-cycle power plants, which emit 40% of the CO2 per power unit vs. coal, the sector would be very close to achieving the goals set for 2030 by the EPA Rule.  The scenario implies the targets could be easily achieved through decisions that would be taken anyway by economic reasons.

Under the EPA scenario, natural gas demand would grow 3.3 Bcf/d by 2020 to supply gas-fired generation that is replacing most of the retiring coal fleet.  This growth in natural gas demand compares to current total consumption of about 72 Bcf/d and is incremental to 10 Bcf/d of LNG export projects already approved by the U.S. Department of Energy which could be operational by 2020.  Yet, given the abundant conventional and unconventional gas resources in North America, the EPA projects natural gas prices will only increase a modest 10% or $0.40/MMBtu as a result of the CO2 emissions rule.

Looking at the coal side of the equation, coal use by the power sector currently accounts for about 80% of domestic coal production.  The retirement of 0.3 million GWh of coal-fired generation anticipated by the same EPA scenario will shrink coal production by 27%, or 228 million short tons resulting, according to the EPA, in a 16% drop in delivered coal prices.  This drop in demand and prices adds to challenges the coal industry has been facing due to competition from cheap domestic natural gas and slow electricity demand growth.  Since 2011 the US has been exporting more than 100 million short tons per year, primarily to Europe, providing some relief to coal prices in 2012-2013.  Notwithstanding the recent export strength, in the long run most forecasts indicate US coal production will continue to decline, particularly in the western states.

The EPA Rule allows flexibility in implementation by proposing state-specific rate-based goals for CO2 emissions from the power sector, as well as emission guidelines for states to use in developing plans to achieve compliance in a manner that accommodates a diverse range of approaches.  The scope of diversity in power generation by state is illustrated by the fact that 19 of the 50 states delivered more than half of their electricity from coal-fired plants, with West Virginia and Kentucky at 90%.  For these two states, the EPA Rule proposes a target reduction of 20% in CO2 emissions.  On the other end of the spectrum is Washington State, with just one coal-fired plant; in this case, the EPA proposes a target of 84% reduction in CO2 emissions.

The EPA assumes states will develop plans involving four categories (“building blocks”) of demonstrated approaches to improve the performance of existing generation units in the power sector:

  1. Reducing the carbon intensity by improving the efficiency of individual generators by changes in equipment, operating procedures or maintenance practices.  Such efficiency changes result in more electricity being generated by each unit of fuel (e.g., ton of coal or cubic foot of gas), thereby lowering the amount of CO2 per kWh of electricity produced as a byproduct of fuel combustion. 

  2. Lowering the electric system’s overall carbon intensity by shifting generation among existing units; for example, dispatching natural gas-combined cycle units before coal-fired units, utilizing state/regional inter connections and/or using carbon cap and trade markets. 

  3. Expanding the capacity of low or zero-carbon generation including nuclear, renewable and new gas combined cycle units.

  4. Increasing the efficiency of electricity demand to reduce the amount of generation required.

Finally, the current submission of the rule is a draft proposal, and implementation is at least two years away.  The EPA will be collecting comments from the public, the states and other organizations and will issue a final document in June 2015.  The states will then have one year to submit their plans for compliance or may request an extension.

As in previous cases, the states may try to take the issue to the courts; however, Federal officials have expressed their hopes that most utilities will want to work with their regulators to ensure successful implementation.  In case of an impasse with any state that refuses to provide its implementation plan, the Federal government has indicated it would then impose its own plan. 

In the end, some might argue that a reduction of 700 million tons of CO2 within the next 15 years, compared to current emissions of over 6.6 billion tons of CO2, could be considered a modest step, although a step in the right direction.  Others may contend that given the relatively recent financial crisis and economic hurdles faced by the US economy, a more aggressive program with a detrimental impact on industrial and residential consumers alike would be imprudent.  The compromise between carbon management and economic impact will no doubt continue to attract much debate, but according to the EPA, this reduction is achievable within manageable cost parameters.  However, in a global context, most experts would maintain that more is needed, and in a shorter timeframe.  The one thing that can be concluded with certainty is that this debate has much further to run.

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Will Natural Gas Dethrone Coal in US Power Generation?

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