The historic decline of US coal

Cheap gas and weak power demand have driven coal’s share of US power generation to its lowest since the 19th century. They are also accelerating its long-term downtrend

29 May 2020 Opinion  Ed Crooks  Vice-Chair, Americas  woodmac.com

The first commercial power plant in the US was Thomas Edison’s coal-fired Pearl Street station in lower Manhattan, which started operating in September 1882. Later that same month, the country’s (and Edison’s) second commercial power plant was started up: the Vulcan Street hydro power station in Appleton, Wisconsin. The race between the two technologies did not last for long. Within three years, coal had become the most-used energy source in the US, overtaking renewables including hydro power and wood.

In the past 15 years, however, coal’s share in the US power mix has been in steep decline. In April, coal provided just 15% of all the electricity used in the US, less than either renewables or nuclear power, according to the Energy Information Administration.

The EIA said this week that in 2019 more US primary energy came from renewables than from coal for the first time in over 130 years. That calculation actually overestimates the contribution of coal, because it compares the energy content of thermal coal, only about 33% of which is available as useful electricity, to the power provided by solar, wind and hydro. Even so, it is another milestone in the decline of coal and the rise of renewable energy in the US.

The latest downturn in coal started in the autumn of last year as the US went into an unusually mild winter, and it has been exacerbated this year by the coronavirus pandemic. As power demand has fallen, it has been coal-fired plants that have borne the brunt of the reduction in output.

US power generation was down 5% in total in April compared to the same month of 2019. Within that, gas-fired generation was up 1% and renewables up 8%, but coal-fired generation was down 32%. In many parts of the US, coal-fired plants are a more expensive technology for power generation than gas, wind or solar, meaning that many generation companies will look to shut them off first.

The way that utilities have begun to operate their coal plants has also changed, according to Matt Preston, Wood Mackenzie’s research director for North America coal markets. Previously, many utilities, particularly in the Midwest, chose to self-dispatch their coal units even when they were not the lowest-cost generation available, on the grounds that cycling the units’ output up and down increased maintenance costs. Recently that has changed, and coal plants are operating much more as the marginal units on the grid.

Global demand for all energy sources, including coal, is already starting to recover as lockdowns are eased. But in the US and Europe, at least, it looks as though the pandemic has accelerated the decline of coal. The outlook for coal demand now depends on policy decisions in large emerging economies, and particularly in China.

There was a sharp difference between the first half and second half of May, Wood Mackenzie analysts say. In the first two weeks, global demand was still soft, and the price of benchmark 6000 kilocalorie per kilogram Newcastle coal dropped to its lowest since February 2016. Since mid-May, however, there has been a marked improvement, with markets starting to tighten and prices rising. In China, the largest power generation companies in the coastal region are consuming coal at above last year’s levels, and in India power demand is rising.

As demand recovers, both China and India have taken steps to help their domestic coal producers. India has relaxed restrictions on the ash content of coal burned in power plants, while in China some generators have reportedly been told to stop importing Australian coal. Wood Mackenzie’s analysts said the move was “targeted at stemming the flow of surging imports into China, in a bid to boost domestic prices”.

In the US, power companies have this year announced plans to shut down another 13 coal-fired plants, with closure dates between now and the 2030s. Two more will be converted to burn gas. The latest announcement was Alliant Energy’s decision to close its loss-making Sheboygan coal-fired plant in Wisconsin. The company said the closure would save it $200 million in near-term costs. Plants that run less often because of weak demand and competition from cheap gas face a greater risk of being shut down

Moves by several US and European banks and other financial institutions to reduce their exposure to coal are also encouraging utilities to accelerate retirements of coal-fired plants. Georgia-based Southern Company in 2007 sourced 70% of its power generation from coal-fired plants. By the fourth quarter of last year, that was down to 22%. Southern said this week that it was on track to cut its greenhouse gas emissions by 50% from 2007 levels by 2025, and was aiming for “net zero” by 2050. It joined other US utility groups including Xcel Energy, Duke Energy, Dominion Energy, NRG and PSEG, which have made similar announcements.

Meanwhile in Europe, low gas prices have similarly meant that coal generation has been squeezed. Austria and Sweden closed their last coal-fired plants last month, and European governments have been working on compensation plans for workers losing their jobs at power stations and in the mining industry. Dale Hazelton, Wood Mackenzie’s head of thermal coal, said he expected to cut forecasts for Europe’s consumption in the 2030s, as countries bring forward the dates when they expect to stop burning coal. Look out for the full forecast when it is published in July.

For global coal demand, though, the most important uncertainty is still over China. As Frank Yu from Wood Mackenzie’s China Power and Renewables team discussed recently, “there is now robust debate within China on the future [electricity] supply mix.” Already this year there has been a pick-up in the pace of final investment decisions for new coal-fired plants, and support is growing for a new wave of construction. The upcoming 14th five-year plan will be critical in determining the course of coal consumption for China and the world