POWER August 2017 - 42

ENERGY MARKETS
Market Dynamics Are Complicated
as Coal Battles Natural Gas
Several factors favor natural gas when it comes to the future of U.S. power
generation. But other forces, such as power demand, energy efficiency,
and the impact of renewables, make it a complex fray.
Mark Repsher, Jamie Heller, Trygve Gaalaas, and Charlie Mann
L
et's talk about the obvious. Since 2008,
coal-fired generation and coal production
in the U.S. have been decimated.
Next story.
Is the coal sector dead, merely biding its
time before King Coal regains his throne,
or left somewhere in purgatory? Well, it's
complicated.
A Brief History Lesson
Since the beginning of the shale gas revolution
in 2008, wholesale generation competition
has favored natural gas-fired combined
cycle facilities, resulting in reductions in
coal-fired generation, coal production, and
coal commodity prices.
Certainly, a portion of the reduction in
coal consumption reflects the permanent
closure of coal-fired plants. The combined
pressure applied by low natural gas prices,
environmental regulations, and normal
maintenance costs of older coal-fired plants
drove these closures-with low natural gas
prices being the force driving many, if not
most, of the retirements. Suffice it to say
had natural gas prices been higher, some
of these retiring coal-fired facilities would
have limped along in lieu of retirement, albeit
with lower operating margins.
However, these coal-fired retirements-a
set of plants with relatively high fuel and operating
costs-reflect only a small portion of
the reduction in coal-fired demand witnessed
in the U.S. For example, total 2015 coal-fired
generation declined by approximately 555
TWh (or 30%) from 2008 levels. However,
only about 185 TWh (or 30%) of this decline
was due to retiring coal-fired facilities (Figure
1). In other words, even if all coal-fired
retirements could be attributed to environmental
control requirements (an aggressive
assumption), the clear dominant factor attributable
to the coal-fired generation decline is
lower natural gas prices (at a minimum, approximately
70% of the decline).
In the wake of this reduction, the generation
gap was filled primarily by exist42
1.
Plant retirements are just one problem for coal. The W.C. Beckjord Station,
located southeast of Cincinnati, began generating electricity in 1952. Duke Energy Ohio
announced the decision to retire the six-unit power plant in July 2011. Courtesy: Creative Commons/Aesopposea
ing
and new natural gas-fired combined
cycle facilities and renewable generation.
Approximately two-thirds of the decline in
coal-fired power output from 2008 to 2015
was shifted to natural gas-fired combined
cycle facilities, with the remaining one-third
shifted to renewable generation (primarily
wind and solar).
How Close Is Close?
Coal- and natural gas-fired resources are
continually competing against one another
in day-ahead and real-time wholesale power
markets. While unit operational constraints
have some effect, these economic tradeoffs
primarily distill down to relative fuel costs
and operating efficiencies of these respective
resources. So, holding relative operating
efficiencies constant, as relative coal
and natural gas fuel prices change, plant
operations will shift.
At higher natural gas prices such as the
$8+ per MMBtu average prices seen during
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2008, coal-fired facilities were certainly always
cheaper to operate as baseload resources
relative to natural gas-fired combined
cycle options. However, coal- and natural
gas-fired resources are very competitive over
a range of lower natural gas prices-for example,
the $2 to $4 per MMBtu band (Figure
2) in which we currently find the market.
During 2016 the Henry Hub natural gas
price averaged about $2.50/MMBtu, low
enough that a natural gas-fired combined cycle
unit would have been cheaper to operate
than almost all U.S. coal-fired units. However,
an increase in the delivered gas price
of $0.75/MMBtu would make the natural
gas-fired combined cycle plant costlier and
reverse this short-term decision-making.
This relatively small band of potential natural
gas price movement is important if we
remember that the system has already " wrung
out " less-efficient coal-fired resources due to
combined regulatory and commodity pricing
pressures. The remaining coal-fired fleet can
POWER | August 2017

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POWER August 2017

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