Natural gas fills the gap as coal drops out of U.S. power market

By Jonathan N. Crawford | Bloomberg | July 4, 2016

Five years ago, opponents of newly proposed clean-air rules sounded dire warnings of blackouts and surging electricity prices if coal-burning plants were shuttered.

Welcome to 2016. Instead of rising, the price of electricity in the nation's largest grid is now 40 percent lower than it was back then, even as a record 346 coal-burning units, producing enough electricity to supply 40 million homes, were retired. The difference: America's shale boom unleashed cheap and abundant natural gas that burns more cleanly than coal.

"You've seen the coal come out of the market and then you've seen a response from industry to capitalize on that hole in the supply mix," said Ethan Paterno, a Denver-based energy industry specialist with PA Consulting Group. "The low gas prices are a big, big deal."

The nation's emergence as the world's largest producer of natural gas has not only sped up the closure of coal-burning plants. It's also put the United States on a surer path to meeting an international accord to slash global warming pollutants and to comply with a host of federal environmental mandates estimated to yield billions of dollars in health benefits.

The mid-Atlantic grid, which stretches from Maryland to Chicago, has been ground-zero for coal-plant shutdowns as the generators compete with gas burners that have access to the cheapest supplies in the country. In that network, the largest in the U.S., about 20,000 megawatts of gas-fired plants are projected to connect by mid-2019, said Paterno, or enough generation to power for about 20 million homes.

The coal closures were driven mostly by the Environmental Protection Agency's pollution rule, which the agency said would cost $9.6 billion annually to implement. The burning of cleaner fuel also produces health benefits, including fewer heart attacks, sick days and up to 11,000 fewer premature deaths annually, worth $37 billion to $90 billion each year, according to the EPA.

More gas-fired generation also helped the U.S. cut emissions of carbon dioxide last year to 21 percent below 2005 levels. The country has set a target to cut greenhouse gases by at least 26 percent below 2005 levels by 2025. Natural gas emits about half as much carbon dioxide as coal when generating power.

The pollution regulation, which requires plants to meet tighter emission limits on mercury and other toxins that can be met with the installation of costly scrubbers, first came into force in April 2015. The rule and cheap power prices resulted in the retirement of 13,000 megawatts of coal-fired generation just last year. That's just a slice of more than 36,000 megawatts of coal capacity that has been shuttered since 2011.

Power producers including Duke Energy Corp. and Luminant Generation Company warned in August 2011 that the coal closures would leave the nation's grid at risk of price spikes and outages, while a U.S. government study projected a boost in prices in parts of the coal-heavy Midwest.

Sen. James Inhofe, a Republican from Oklahoma, said in August 2011 that the EPA was reckless in proposing a rule that threatened to put a "significant strain" on the electric grid from the forced closure of hundreds of coal plants, and which would raise electricity rates across the country.

Wholesale power in PJM's benchmark West hub, which includes deliveries to Washington, averaged $30.08 a megawatt-hour in the first quarter, down 41 percent from $51.17 in 2011.

The transition was smoothed by other factors as well. Milder weather and technologies boosting efficiency, such as energy-conserving light bulbs and refrigerators, have slowed demand.

With consumption stagnant, cheap fuel is an incentive to build replacement plants. Natural gas prices in Pennsylvania, the home of the most prolific shale reserve, plummeted to as low as 59 cents per million British thermal units last year, down from more than $14 in 2008. Gas production has more than doubled since 2012.

The shale boom and coal plant retirements have made the U.S. one of the top three locations for building power plants, along with the Middle East and South Asia, according to General Electric Co.

"Go back five years ago, and I think of the world's gas turbine heavy duty market, very little was in the U.S.," GE Power Chief Executive Officer Steve Bolze said in an interview at Bloomberg's New York headquarters this month. "In the last couple years, it's been close to 15 percent of the global market."

Private equity firm Panda Power Funds is among the companies building gas plants by the Marcellus shale basin to take advantage of the low-cost supplies. The Dallas-based developer anticipates two of its power generators plants in northeastern Pennsylvania, with enough power to serve up to 2 million homes, will start this year.

"What we are experiencing right now is the biggest sea change in the power industry in my lifetime" said Bill Pentak, a spokesman for Panda in Dallas. "Shale gas is helping to drive the change."

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Well, all of this is good and fine. The problem is this will only last 10 years or so if the Democrats are elected. Both Sanders and Hillary  want to end fracking. That seems to be the most important thing for them in their campaigns. Don't understand why? Fracking probably kept the US economy from going into a full depression in 2008 with cheap NG being the savior.

I don't think you have anything to worry about, Joe.  I'm not worried about a federal ban on fracking. The Democratic Party Platform committee rejected any mention of a ban on fracking.   I would like to see federal regulations that mandated best practices and prohibited any state or local municipality bans or moratoriums. 

The second great depression was avoided by instituting economic stimulus.  Europe took the opposite approach - austerity.  They are still mired in a deep recession that has strained much of the EU to the breaking point.  Our economy is quite healthy in comparison.

The focus of the article that I found worth posting was all the nay sayers who predicted blackouts and high electricity prices.  Yes, natural gas is far too important to the nation for any president or Congress to ban. 

Skip

I respectfully suggest you look into the projections for California for this summer, with a strong potential for brownout/blackouts due in part to policy regarding various energy generation and reduced NG availability due to Alison Canyon.  

dbob, I suspected that there were exceptions when the article stated, "the price of electricity in the nation's largest grid".  I don't know if that includes California or not.  Regardless, the majority of consumers across the country seem to be experiencing decreased prices.  I know I am but I also know of some exceptions in my part of the world.  Central LA CLECO customers pay much higher rates than I do on AEP SWEPCO.  Where there is no shortage of NG supply, I suspect rates have come down for the majority of customers.

http://www.geni.org/globalenergy/library/national_energy_grid/unite...

Skip, SWEPCO's rates are lower.  However, do you realize where the SWEPCO power comes from?  As per their website, of the 2,692 megawatts they show from power plants only 508 of them are from the STALL gas power plant.  I also know that the cost of fuel (coal) to the Pirkey Power plant is about $2.75 per million btu.  I think the price of natural gas has recently climbed above that. 

For my location I believe that my electricity comes from Stall.  Are you saying the other 2184 megawatts come from AEP coal fired plants?  I'm unaware of how many plants/megawatts in the AEP SWEPCO system are capable of switching between the two fuels.  Yes, where utilities and merchant power plants can use either current NG prices may move some generation back to coal.  The wildcard is long term supply contracts.  I suspect that electric generation companies have relatively long term purchase contracts and do not purchase based on the spot or monthly settlement prices.

I read the Bloomberg article over the weekend, and noted, as you did, all of the predictions by nay-sayers of the EPA rules.  HOWEVER, electricity customers all over the country truly "lucked-out" and avoided catastrophe with the unforeseen discovery of shale gas, which combined with the existing and refined fracking technology, produced huge amounts of NG, and the surplus dropped the price considerably.  Had it not been for the shale gas, It is this point that the article makes clear.  The article does not wander off into the "what if," but I think some version of the predictions of doom would have come true but for the shale gas coming on the market.

I heard another piece of news over the weekend about Interior's effort to regulate fracking.  The article says that the Energy Policy Act of 2005 actually prohibits the federal government from regulating fracking.  I haven't had a chance to check that out, and won't have a chance for several days, but perhaps some of you out there will have some time to do so.  If that is true, then as long as the R's retain the House, that should remain in place, notwithstanding what the Democrat platform does or doesn't say on the matter.  Individual states will continue to have the authority to regulate fracking, of course.

...and individual states will have the authority to prohibit fracking.  And block permitting of new pipelines.  Their consumers will have to pay a premium for their electricity unless they would prefer to support new nuclear capacity.

The nay sayers to which I refer are those that made the dire predictions five years ago as mentioned in the article.  The shale revolution was well underway by then and the "luck" was an already factored in reality.

I have no fear of a president or Congress prohibiting fracking because it would be sheer political suicide.  The Hard Greens are a quite small minority even when considering only the portion of the electorate that is D or lean D.  No politician who supports actions that will drastically raise the cost of energy to the American consumer will long remain in office.

Skip:  I have followed both the Clean Air regulations and the shale gas development, and I respectfully disagree with your point.  In 2011, I don't think any of us fully understood the scope of the shale gas reserves in the US.  In addition, government "rule-making" is a slow process, so it would be hard to line up the two time-lines - Clean Air Act regulations for coal plants and Shale NG discovery/development, and find that those claiming "the sky is falling" for the grid were disingenuous.  At the time, I shared those concerns.

Skip CLECO power is going to be free for me for about the next three months.

LOL!  Great. Good timing.  I thought the deal for the sale approval from the PSC was for customers to get one month free.  The other side of that coin is continuing high rates compared to other LA utilities.  And continuing generation using lignite coal.

Steve, certainly okay to disagree however I was aware of a number of Haynesville reserve estimates in 2008/2009.  Independent reserve estimates and those publicized by the operators.  Several from right here in Shreveport. The Barnett and Marcellus also had sufficient data upon which to base play reserve estimates at that time. 

Here is a link to one of the trailers for Haynesville, The Movie.  Although this was posted to YouTube in Jan. 2010, it was filmed and the estimate is from 2009.

https://www.youtube.com/watch?v=cLMa3E1HI5U

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