While geopolitical risk definitely remains…
Chevron’s ‘unprofitable’ natural gas assets…
Today, as had been expected, Peabody Energy Corp. (NYSE: BTU) — the largest coal producer in the United States — filed for Chapter 11 bankruptcy protection. Following the announcement I immediately began to receive press releases from various environmental organizations crediting the rise of renewable energy and/or the campaigns to divest investments from fossil fuels for the decline in the U.S. coal industry.
A press release from 350.org declared Peabody’s bankruptcy “A harbinger of the end of the fossil fuel era.” While I applaud a transition away from coal, these organizations are falling all over themselves to give credit to everything except the primary culprit behind the demise of the U.S. coal industry, which is natural gas (as I demonstrate below). In fact, many of these organizations have circulated stories — usually from those with clear vested interests — intended to discredit the indisputable role that natural gas has played. So let’s take a closer look.
Taking Undue Credit
There are in fact a number of reasons for the U.S. coal industry’s troubles, but the biggest factor is displacement of coal by natural gas in the power generation sector. The shale boom created a surge in U.S. natural gas production, and natural gas prices have in turn become depressed. Environmental regulations have also been passed that require power producers to reduce greenhouse gas emissions. Natural gas produces a lot less carbon dioxide per unit of power produced than does coal, so this combination of abundant natural gas supplies, low price, and environmental regulations has caused a pretty dramatic shift in the power markets over the past decade.
Recently the Energy Information Administration (EIA) published a graphic that highlighted the role of natural gas in displacing coal:
Environmentalists who credit the role of renewables in the coal industry’s woes often emphasize that most new electrical generating capacity lately has been renewables. In fact, in the Federal Energy Regulatory Commission’s (FERC) most recent “Energy Infrastructure Update”, the agency noted that 468 megawatts (MW) of wind power and 145 MW of solar power accounted for 100 percent of new electrical generation capacity brought into service in January 2016. FERC’s December 2015 “Energy Infrastructure Update” revealed that renewables were responsible for 64 percent of all new electrical generating capacity installed last year.
Related: U.S. Oil Supply To Fall Faster Than Expected
But capacity isn’t production. Coal provides what is known as firm power, which means power that is normally available for transmission as needed. Because renewables like wind and solar power are intermittent, they require much more installed capacity than does natural gas to displace coal power. The capacity factor — that is the amount of power produced divided by the power that would be produced if the power source was producing at full capacity at all times — is around 90 percent for nuclear power, 70 percent for geothermal power, and 50-70 percent for coal-fired and natural gas-fired power. But capacity factors for wind and solar power are much lower.
Thank Natural Gas
This is why, despite the fact that renewables took the lion’s share of new electrical generating capacity installed last year, it was natural gas that seized the largest share of power production from coal utilities. EIA numbers show that between 2014 and 2015, the amount of power generated from coal in the U.S. fell by 226,000 gigawatt-hours (GWh). At the same time, the amount of power produced from natural gas increased by 208,000 GWh.
Renewables, on the other hand, contributed a mere 10,000 GWh year-over-year increase. That’s not nothing, but it’s certainly not a huge contributor to coal’s decline.
Related: Saudi Arabia Steps Up Drilling Despite Downturn
This can clearly be seen in the longer-term trends as well. In the EIA graphic above, since 2000 coal’s market share has fallen from around 50 percent to this year’s estimated 32 percent (down 18 percent). Over the same time frame, the market share for natural gas has increased from around 15 percent to this year’s estimated 33 percent (up 18 percent). Thus, almost all of coal’s losses in the power sector since 2000 can be explained by increased natural gas consumption.
The reason this matters is that some have suggested that natural gas has no future in the power generation sector, and that we should transition directly to renewables. The argument is that natural gas is still a fossil fuel, and thus contributes carbon dioxide emissions to the atmosphere. But natural gas is a vastly cleaner option than coal, and more importantly it has already demonstrated that it can displace firm power produced by coal at a large scale. If we fail to recognize important issues of scale and intermittency in power generation, we may create future supply risks by expecting renewables to do too much, too soon.
Several times a week I get press releases from environmental organizations that are misleading and/or factually incorrect. I have received several today following the bankruptcy announcement of Peabody Energy. Without a doubt, some of these organizations do good work, but if one is to make the argument that money is a corrupting influence, you have to believe that some of these organizations aren’t immune from that influence.
Related: Why India Matters More For Oil Than China
A few years ago I highlighted some of the financials of a prominent environmental “non-profit.” They had $250 million in assets, annual donations of more than $100 million, and a dozen employees listed as receiving more than $200,000 a year in compensation. That’s pretty lucrative, so it’s not hard to understand why some might succumb to some deception to sell their product. See this article for an example of deception by 350.org’s Bill McKibben regarding natural gas. A study in Science showed increasing methane in the atmosphere is coming primarily from agriculture. McKibben referenced the Science article, but then ignored the study’s conclusions — insisting instead that fracking is to blame. And if you just send 350.org a donation, he will surely prove it.
So don’t expect to receive a fully truthful account of why the coal industry is in trouble from environmental organizations. You can get that from me, but you don’t have to take my word for it either. You can go to the Energy Information Administration and verify the shifts in the power sector for yourself.
By Robert Rapier via Energytrendinsider.com
More Top Reads From Oilprice.com: