The Death of Coal

Move over coal….now there’s something cleaner, but will it be cheaper?

As originally reported by the Associated Press,  more than 32 mostly coal-fired power plants are scheduled to  close, and another 36 plants could also be forced to shut down as a result of new EPA rules regulating air pollution.  But many analysts believe the actual number of closures will be far greater, and with EPA finally presenting their new emission standards regulations, natural gas-fired generation will need to take the front seat in the future of electricity generation.

Currently, coal is the leading fuel source for generation plants in the U.S. comprising of 39% of total generation, compared to Natural Gas making up 27%, (according to the U.S. Energy Information Administration). This is all set to change as the generation industry shifts to natural gas from coal.

How will all of this affect the coat of electricity in the years ahead? In 2008, Barack Obama stated that his energy plan will cause electricity prices to “necessarily skyrocket.” With transitional costs for this “transfer of power” estimated in the billions, it is still unknown how this shift will ultimately affect the overall price to end users. The EPA expects their regulations will increase the cost of retail electricity in the years ahead as decreases in coal-fired power increase the demand for natural gas with an estimated 1.2 trillion cubic feet of natural gas needed to make up for the lack of coal power by 2020. The Energy Information Administration agrees with the EPA that closing coal plants will drive up natural gas prices substantially in the years ahead.

An additional risk during the transitional period of switching to natural gas is despite an apparent glut of natural gas from the Marcellus Shale reservoirs, as well as other fracking endeavors, there is building fear that the capacity gap cannot be filled by natural gas due to deficiencies in our existing pipeline capacity.  The lack of pipeline capacity has already led to supply shortages and price spikes in the Northeast region of the U.S. during periods of peak demand.  Last winter, system operators relied on several generators that will not be available for all or part of this winter, based on currently planned coal-fired generation closures. That coupled with the slow process of creating new power plants, has left many industry leaders wondering if we are headed towards a crisis.

Many in the energy generation sector however, welcome these new regulations. Those who stand to benefit from these changes range from utility companies like Exelon and PG&E, who own natural gas or nuclear power plants, to renewable energy producers, who anticipate a sharp incline from those who seek alternatives to the current, heavily coal laden generation industry.

Despite disagreement on how these regulations will ultimately affect the average energy consumer, all can agree that a major shakeup will occur in the industry to implement these changes. We are clearly heading into a period of great uncertainty, which will likely lead to great price volatility.  For the average commercial business, the best bet is to have an energy strategy in place. These strategies will differ by business type, load profile and geographic region.

Whether you like it or not, these changes are already coming to fruition. What you do to offset this potential risk needs to be addressed.

Ray Franklin
Senior Commodity Analyst