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Coal Over Natural Gas: Seasonal Trend or New Standard?

Robert Rapier

The EIA estimated that coal will overtake natural gas in power production this winter. Are these simply seasonal power generation trends?

The Energy Information Administration (EIA) recently projected that coal is likely to overtake natural gas this winter in electricity production. Are these seasonal power generation trends or will the shift back toward coal last?

Historical Electricity Generation Patterns

During the 1980s, the share of coal in the US power mix increased sharply, reaching nearly 60 percent of all power production by the end of the decade. Each decade since has seen coal lose market share, with that loss accelerating in the past 10 years. Although renewables have made a small dent in coal's use, the primary culprit has been a rise in natural gas consumption by utilities.

Renewables have been the source of most new electrical generating capacity installed in recent years, but it was natural gas that seized the largest share of power production from coal utilities. For example, EIA numbers show that between 2014 and 2015, power generated from coal in the US fell by 226,000 gigawatt-hours (GWh). At the same time, the amount of power produced from natural gas increased by 208,000 GWh, while renewables contributed a mere 10,000 GWh year-over-year increase.

This shift is clear in the longer-term trends as well. Since 2000, coal's use has fallen from approximately 50 percent to 2016's estimated 32 percent (down 18 percent). Over the same time frame, the use of natural gas increased from around 15 percent to this year's estimated 33 percent (up 18 percent). The EIA recently estimated that on an annual basis, 2016 was the first year that natural gas surpassed coal in the mix of fuel used for US power generation.

Coal's losses in the power sector since 2000 were primarily a result of increased natural gas consumption. This shift has been driven by a combination of regulatory and economic factors.

Factors Behind the Shift

To understand why regulations might drive a power plant to shift to natural gas from coal, consider the production of 1 kilowatt-hour (kWh) of power. Because coal consists largely of carbon, the primary emission from combusting coal is carbon dioxide. According to the EIA, the production of 1 kWh of power from coal generates about 2.2 pounds of carbon dioxide. Natural gas, on the other hand, contains a higher percentage of hydrogen, which produces water vapor when combusted. As a result, the production of 1 kWh of power from natural gas generates about 1.2 pounds of carbon dioxide—45 percent less than coal. Thus, regulations aimed at reducing carbon dioxide emissions make natural gas a more attractive fuel than coal.

But the other key driver has been low natural gas prices ushered in by the US shale gas boom. Since 2005, a combination of hydraulic fracturing and horizontal drilling has dramatically boosted the fortunes of natural gas in the US. From 2005 to 2015, US natural gas reserves grew by 80 percent, while production rose by 50 percent. This rapid change in the US natural gas supply resulted in an oversupply situation, and natural gas prices that had regularly spiked above $10/million British thermal units (MMBtu) from 2005 to 2008 plummeted to less than $2/MMBtu in 2012.

This price drop made natural gas much more attractive to power producers, as it significantly reduced the historical price differential between coal and natural gas. Utilities that had the option of utilizing gas turbine plants instead of coal steam turbine plants to generator electricity did so.

When natural gas prices fell to about $2.00/MMBtu in early 2012, natural gas briefly came close to surpassing coal-fired generation across the US. But then gas prices rose back above $3/MMBtu, and the percentage of coal use increased. This is similar to what has happened in recent months. Natural gas prices spent much of the first half of 2016 under $2.00/MMBtu and most of the year under $3/MMBtu. This made natural gas prices competitive with coal, and utilities that could, switched fuels.

A Look to the Future

In December 2016, natural gas prices surged back above $3/MMBtu, negating the economic benefit and prompting some utilities to fire those coal steam turbine plants back up. The outlook from here will be strongly impacted by natural gas prices, but that could be trumped (no pun intended) by the impact of environmental regulations. President Trump has promised to help the coal industry. One way he may try to do that is to eliminate President Obama's Clean Power Plan, which promises to push utilities away from coal and toward natural gas (and renewables) on a permanent basis.

The recent switch from natural gas to coal isn't due to seasonal power generation trends as much as it is being driven by natural gas prices that have bounced back from decade-long lows. The sub-$2/MMBtu natural gas price of early 2016 strongly favored natural gas, while the economics of coal looked much more attractive as natural gas prices rose back above $3/MMBtu. (Coal prices have risen as well, but not as sharply as natural gas prices).

However, over the longer term a combination of environmental regulations aimed at reducing emissions and an abundance of cheaper natural gas have resulted in a long-term drop in use of coal in power generation, primarily to natural gas. Unless those environmental regulations are rolled back, or the US natural gas outlook worsens, the recent shift back to coal is likely to prove fleeting.

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