The Fuse

Natural Gas Overtaking Coal as Top Source for Electricity Generation Has Broad Implications

by R. Kress | July 22, 2015

For the first time ever, natural gas has overtaken coal as the U.S.’ top source for electricity generation, a trend that has large implications for the country’s electricity sector. As of April 2015, natural gas provided 31 percent of all electric power while coal fell to 30 percent—painting a very different picture from how things looked just five years ago when natural gas provided only 22 percent and coal produced 44 percent.

For the first time ever, natural gas has overtaken coal as the U.S.’ top source for electricity generation, a trend that has large implications for the country’s electricity sector.

While the domestic oil and gas boom and falling natural gas prices are certainly major drivers of this energy shift, there may also be some other factors at work.

Just last month, several of the world’s largest oil companies came together to signal their readiness to support carbon pricing, which could be a major boon for natural gas.

“Our industry faces a challenge: we need to meet greater energy demand with less CO2,” reads the letter signed by the chief executives of BP, Royal Dutch Shell, BG, Total, Statoil and Eni. “… Carbon pricing will discourage high carbon options and reduce uncertainty that will help stimulate investments in the right low carbon technologies and the right resources at the right pace.”

With the already-weakened state of the coal industry, will this move by oil companies be a final nail in the coffin for coal?

“One possibility is that [oil companies are] looking at this with a longer-term perspective, aware that nothing might ever take place, and that if something does, the two principal choices have long been considered to be cap-and-trade and a carbon tax,” Michael Quinn, a natural gas industry expert at the Analysis Group, told The Fuse, noting that his perspective represents his opinion and not that of his organization.

Quinn added: “While [oil companies] may prefer the status quo, they may also be expressing a preference for the case if there will be a change, they’d rather have a carbon tax than any other form, particularly cap and trade. There are lots of reasons to prefer a carbon tax as the regime to introduce, among which are breadth and reduced uncertainty.”

A call for carbon pricing may not be an intentional move on the part of some in the oil industry to further weaken coal’s place in the market. In fact, any efforts to destroy the coal industry may no longer be necessary, given that coal is in terminal decline on many levels.

In a harbinger of what may be to come for coal, one could look at China—one of the world’s largest coal consumers, accounting for more than two-thirds of the nation’s power. But so far this year, there’s been a faster-than-expected dip in China’s coal usage. Even as the country’s electricity demand is poised to increase dramatically through 2030, coal usage is projected to plateau. Globally, demand for coal is also down.

While there are myriad reasons for this decline, natural gas has already been touted for some time as a bridge fuel before wind, solar and other renewables become increasingly more cost effective.

While there are myriad reasons for this decline, natural gas has already been touted for some time as a bridge fuel before wind, solar and other renewables become increasingly more cost effective. In the meantime, Quinn sees even a broader point to consider: how natural gas is more complementary than coal to an increasingly renewable-focused grid.

“Natural gas appears likely to continue to overtake coal for electricity generation, regardless of whether some form of carbon pricing is enacted, and regardless of who supports such policies,” Quinn explained. “Another aspect to consider is that gas-fired electricity generation may better complement wind and solar than would coal-fired generation, as the former ramps up and down far more quickly.”

The chart below from the U.S. Energy Information Administration’s Electric Power Monthly further illustrates the trend. Wind, natural gas and solar are on the rise as coal is scheduled for large-scale grid retirements this year.coalvnatgas

Source: EIA

The EIA attributes the significant number of coal generator retirements—largely in the Appalachian region—to the EPA’s Mercury and Air Toxics Standards (MATS), adopted in 2012, which cracked down on emissions from these plants. Many operators found that retrofitting their plants to fit the new MATS regulations was more expensive than retiring them altogether—especially as a result of lower demand for coal and natural gas becoming increasingly competitive. However, with the U.S. Supreme Court’s decision last month to upend the MATS regulations, some plants that applied for an extension through April 2016 on meeting the new restrictions will be allowed to keep operations going a bit longer. But even with the declawing of the EPA’s MATS regulations, it’s clear that the coal industry is running on borrowed time.

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