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Electricity Markets Increasingly Favor Alternatives to Coal

This piece originally appeared in the National Journal Energy and Environment Experts Blog.

The U.S. electric power system is gradually shifting toward cleaner forms of generation. One sign of this transition is the declining use of coal for electric power production. In 2011, coal dropped to its lowest level of power generation in more than a decade, according to the U.S. government’s independent Energy Information Administration (EIA). In fact, the EIA recently reported that coal’s share of U.S. electric power generation fell below 40% for the last two months of 2011, the lowest level since 1978.

To understand the cause of this decline, it is important to examine the underlying market forces. Doing so provides important context for recent coal plant retirement announcements, particularly given that some companies have attributed retirements to EPA rules that are still years away from going into force. For example, FirstEnergy Corp. announced in late January 2012 that it would retire several of its smaller coal-fired power plants, explaining that the decision was “based on the U.S. Environmental Protection Agency Mercury and Air Toxics Standards (MATS), which were recently finalized, and other environmental regulations.” FirstEnergy, however, had previously cited a range of reasons for its decision to reduce operations at many of its smaller coal plants. Furthermore, available evidence does not support the notion that new EPA regulations are the primary driver behind recent coal plant retirements. These business decisions are heavily influenced by market forces, such as falling natural gas prices, declining demand for electricity, rising prices for coal and the expanding market for renewables.

A Closer Look at Key Drivers

Following are some of the key drivers influencing the direction of the U.S. power sector:

  1. Natural gas prices are low. Monthly average prices for natural gas delivered to electric generators are approaching a 10-year low, which is largely attributable to the rapidly expanding supply of shale gas. As a result, wholesale prices for on-peak electricity are down in most parts of the United States.

  2. Coal prices have increased significantly. U.S. average annual coal prices have increased by more than 70% in the past decade (inflation adjusted), driven in part by growing exports. Between 2005 and 2011, U.S. coal exports grew at an average annual rate of 14%. In addition to growing demand for coal in Asia, rising U.S. coal prices have also been attributed to declining productivity at U.S. coal mines, which dropped by more than 20%, on average, between 2000 and 2010.

  3. Growth in electricity demand has slowed. In the past couple of years, growth in U.S. electricity consumption has declined in part because of the economic recession, but also as a result of technology advancements, along with programs designed to promote energy efficiency and demand side management. In fact, EIA data (AEO 2011, figure 76) show that U.S. electricity demand growth has gradually slowed over several decades.

  4. Renewables are becoming more affordable and their market share is on the rise. In some regions, renewables are already becoming cost competitive. For example, the Public Service Commission of Michigan, which is responsible for approving new electric power contracts, recently found that new contracts for electricity from new wind farms were up to 40% cheaper than the cost of building new coal-fired power in that state. The trend of increasingly affordable renewable electricity is forecast to continue. According to the EIA, new wind power is expected to be more affordable than new coal-fired power in many regions by 2016.

These trends are driving significant shifts in U.S. energy markets that fundamentally challenge prior assumptions regarding the direction of U.S. energy investments. Natural gas is cheaper, coal is more expensive, electricity demand growth is down, and renewables are already more cost-effective than new coal plants in some markets.

New EPA rules will provide significant benefits to consumers, as well as protect public health and the environment by augmenting shifts toward cleaner and more efficient energy sources. With compliance deadlines still three or more years away – as is the case of the Mercury Air Toxics Standard (MATS) – and other market forces already contributing to declining U.S. coal use, available evidence does not support claims that new regulations are to blame for the retirement of America’s aging coal fleet.

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