Winners and Losers in the Coal-to-Gas Switcheroo
With natural gas prices at incredibly low levels and a new effort to tap more domestic natural gas moving briskly forward, many utilities are considering the short-term costs and long-term value of converting to natural gas-fired plants.
In January 2010, the Sierra Club targeted 105,000 megawatts' worth of then-running coal-fired power plants for closure. To this end, the environmental advocacy group pledged a massive lobbying and public relations effort, rallying support from like-minded individuals and organizations.
At the time, conventional wisdom held that "cap-and-trade" legislation to regulate carbon dioxide (CO2) emissions would be the easiest road to reduced coal use in the US. Faced with higher costs, the reasoning was, owners of coal-fired power plants would choose: Absorb new taxes of unknown magnitude, switch to less CO2-intensive fuel, or try to retrofit existing facilities with equipment that would reduce CO2 emissions.
All were considered too expensive for utilities and other power producers to be trusted with doing on their own. So the Sierra Club and other environmental advocates focused on pushing the president and what were then overwhelming Democratic Party majorities on Capitol Hill to act.
They failed. And with the crushing Republican Party victories in the 2010 midterm elections, cap-and-trade's chances of seeing the light of day went from slim to nonexistent.
That's where things stand in the political arena today. The Environmental Protection Agency (EPA) is more aggressively enforcing other emissions regulations for coal-fired plants passed under prior legislation, such as for mercury and emissions that cross state lines. And EPA Administrator Lisa Jackson now says the agency will have a rule for carbon dioxide "early this year" for power plants.
Even if this proves to be the case, however, there's already a challenge to EPA's authority on the issue in the US Court of Appeals for the District of Columbia. And if there's a change in control at the White House in November, any rules Jackson promulgates will almost surely be quickly discarded by her successor.
Ironically, the power industry is already halfway to meeting Sierra Club targets on its own. To date, companies have announced shutdowns of 106 coal-fired plants by 2015, or a total of 43,000 megawatts. And more are certain to follow.
Producers have roundly blamed environmental rules for the closures. The cost of new power plants, however, has always been passed along to customers, either as higher regulated electricity rates or higher wholesale power prices. This was the case with the cap-and-trade systems that limited ozone emissions and, later, acid rain.
There are two key differences this time around, both of which are directly related to market forces.
- First, these plants are aging. Companies have been able to keep them running by replacing parts when needed. But doing so has become progressively more expensive, even as run rates have declined.
- Second, natural gas prices have crashed to the neighborhood of $2.50 per million British thermal units, at the same time utilities' cost of borrowing has slid to near all-time lows. Low gas prices are due to massive new discoveries found in shale, and the ability to get it out with hydraulic fracturing.
This trend is likely to be with us for a while, or at least until there's meaningful liquefied natural gas (or LNG) export capacity. And with pipelines and energy midstream assets getting it out as never before, utilities and other generators are locking in cheap supplies, even as they're able to construct new plants to run on gas with inexpensive capital.
Those economics won't change, even if President Barack Obama is defeated and a Republican-controlled EPA rolls back all clean-air regulations. This means we're almost surely going to see more coal-fired plants shut down around the country, as owners come to the decision they're better off running on something cheaper.
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