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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The Inevitable Decline Of U.S. Coal

Coal shipping

Back in the "good old days" when Tony Blair was leading the UK’s “New” Labor Party, he had to keep coal miners — the backbone of the old Labor Party--happy while ostensibly not interfering with the market. Be-ing New Labor means never interfering with the wisdom of the market. Instead he banned construction of new gas-fired power plants not already authorized.

The previous Tory government had already authorized enough gas fired power stations to cover all new demand for the next ten years. So Blair demonstrated fealty to the miners while accomplishing little in the way of reviving the UK's declining coal industry. From the look of the numbers, it does not appear as if American politicians promoting coal will do more.

The U.S. has about 1,070,000 megawatts (MW) of generating capacity which breaks down as follows:

Renewables 187,000
Coal 272,000
Gas 364,000
Other fossil 133,000
Hydro, and other 24,000
Nuclear 100,000

According to the Energy Information Administration, roughly 15,000 MW per year, mostly coal, will be re-tired, with or without new regulations. This is one way to gauge the so-called “war on coal” proposed by the Obama Administration. But in reality those coal plants slated for somewhat premature retirement are old and uncompetitive.

In the U.S., trends in electricity usage have been flatlining for years. Our government, on the other hand, optimistically believes electricity usage might increase by 1 percent per year. If so, the domestic power industry will need about 10,000 MW of new capacity per year to meet this new demand. We will also re-quire an additional 15,000 MW per year of new power generating plants to replace those being retired. Does the industry have those plants ready to go?

Just looking at plants presently under construction the answer is a resounding no. For 2016-2020, the U.S. electric utility industry had 44,000 MW scheduled to be built or completed--about one third of what we supposedly need.

But here is how things have changed. In previous decades, electric companies needed long lead times to build huge coal and nuclear facilities. At present, only one small coal facility is under construction and no new nuclear units are scheduled to come into service after 2020. Adding in the pending and permitted gas and renewable units easily makes up for the capacity deficit. (All plant construction data from the Nuclear Energy Institute.)

Capacity additions under construction (44,000 MW) for 2016-2020 look like this (in MW):

Natural gas 22,000
Nuclear 6,000
Renewables 15,000
Hydro and other 1,000

That is, coal additions get lost in the rounding.

The schedule of plants permitted or pending (137,000 MW) makes the shift clearer:

Natural gas 63,000
Renewables 45,000
Hydro 22,000
Coal 4,000
Nuclear 3,000

Planned construction (still on the drawing boards) consists of 65 percent renewables, 27 percent natural gas, 4 percent hydro and 2 percent coal. If it is not on the drawing boards, and it is coal or nuclear, it won’t be built by 2020. Related: Billions Of Barrels Of Undiscovered Oil May Lie Under Barents Sea

The electric industry is gradually leaving coal behind as a boiler fuel. Over an even longer time frame the same may happen to natural gas. If electric demand does not pick up, renewables will continue to canni-balize sales from fossil fuel generation. It's basically a zero sum game.

But let's assume for the moment that we do see a big boost in domestic electricity sales and generation. What impact would that optimistic outcome have? We expect that power plants fueled by coal as well as and nuclear will continue to lose market share--but they might be able to keep absolute sales steady. Enough to perhaps survive, but not likely enough as an industry to thrive.

However, we are not betting on a big increase in kilowatt hour sales. Demand for electricity is growing. But so are offsetting efficiency measures and conservation. And as far as the growing penetration of re-newables go, we suspect that die has already been cast especially in high cost power markets.

By Leonard Hyman and William Tilles for Oilprice.com

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  • JHM on October 15 2016 said:
    From 2005 to 2015, coal generation capacity factors in the US have fallen from 67% to 55%. Thus, there is still an oversupply of coal capacity despite its reduction over this period. Capacity is declining because utilization is down, and not the other way around as the authors seem to suggest.

    Meanwhile, capacity factors for combined cycle natural gas plants have increased from 35% to 56% for 2005 to 2015. Thus, the build up of natural gas generation has simply kept up with increasing volume demanded. So this capacity is growing because utilization is up.

    The problem for coal is simply that natural gas has become cheaper. All other issues such as environmental concerns are secondary. The primary driver is price competion among fuels.

    Consequently, any politician that wants to privileged the coal industry and its labor force must find some way to make natural gas more expensive than coal. Essentially this amounts to somehow taxing gas more and subsidizing coal. Moreover any scheme in this direction would essential raise the cost of energy for the whole economy. Anyone with even a modest respect for free market economics should see through this immediately. Any politician who would privilege coal is promising to interfere with market competition.

    Politics aside, the challenge for coal is to somehow produce coal at lower cost than natural gas. And for good measure, it would not hurt to generate power from coal with lower emisions than natural gas. Can the economics work out for coal and provide a living wage for labor? It looks doubtful. Indeed, it looks doubtful that even natural gas can long compete with wind and solar on price and emissions.

    In the meantime, coal plants with really low capacity factors need to be retired, until the remaining fleet can achieve a 65% average.
  • David Hrivnak on October 16 2016 said:
    Another nail in the coal coffin is the dropping prices of solar and wind. We now power our house and two plug-in cars from our rooftop solar. We will never go back. The EIA says more wind and solar will be added to the grid this year than all fossil fuels combined.

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