Robust growth in Lower 48 natural gas reserves and an increasing focus on reducing emissions are painting a bleak outlook for coal-fired power plants. Coal skeptics say the fuel can't be "clean," at least not economically, and that gas is the future. But others say gas is unable to claim the huge segment of the generation stack that some of the cleaner fuel's advocates claim is its right.
This week the Environmental Protection Agency (EPA) released the draft of its Clean Air Transport Rule (CATR), which is to replace the Clean Air Interstate Rule (CAIR) with sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction targets that are similar to those of the former rule but accelerated somewhat (see Power Market Today, July 7).
"...[I]t is clear that the proposal will likely lead to an increase in natural gas demand from the electric power sector," noted Credit Suisse analyst Teri Viswanath.
She suggested that gas demand will get a bump early on as coal units are taken down for environmental retrofits. "Over a longer time horizon, we think that utilities will elect to retire older, less efficient plants, leading to higher utilization of gas units," she said in a note this week. "We note that there are nearly 20 GW of announced coal plant retirements that are scheduled over the next decade."
But not all coal-fired capacity will go quietly if an analysis commissioned by the American Public Power Association and the Utility Air Regulatory Group and performed by the Aspen Environmental Group is accurate.
"If all existing coal-fired generation were to switch to gas today, overall natural gas demand would total 36 Tcf per year, or half again as much as today," wrote Aspen analyst Catherine Elder. "Two-thirds of the natural gas produced in the U.S. would serve electric power plants, compared to just one-third today."
What's more, Elder argues, that replacing 335,000 MW of coal-fired generation at a gas-fired cost of about $1 million/MW would cost about $335 billion. She also raises the specter of continuing debt service on utility-owned coal-fired plants, of which about 30% are younger than 30 years and likely not paid off.
However, not all of the existing gas-fired generating capacity on the ground now is being used, at least not all the time, as most of it is peaking generation. America's Natural Gas Alliance, which is lobbying for more reliance on gas-fired generation, makes this point (see Daily GPI, Sept. 8, 2009). A recent report by the Massachusetts Institute of Technology, "The Future of Natural Gas: An Interdisciplinary MIT Study," pointed out that a significant amount of gas-fired capacity is not being used to its full potential, and this is the result of overbuilding (see Daily GPI, June 28).
The Aspen study, "Implications of Greater Reliance on Natural Gas for Electricity Generation," found that:
"There is a significant body of regulation under way and the potential for new regulation or legislation that will impact coal plants in particular," said APPA CEO Mark Crisson.
The pipeline trade association Interstate Natural Gas Association of America said the Aspen study cited "an extraordinarily unrealistic scenario in which all existing coal-fired electric generators are retired and replaced by gas-fired generators. When expectations about the growth in natural gas demand for electric generation are scaled back to reasonable levels, it is clear that there both is adequate natural gas supply and an ability to expand natural gas infrastructure on a cost-competitive basis.
"Furthermore...it is important that the costs and challenges of greater reliance on natural gas for electric power generation be evaluated in comparison to costs and challenges of other options...For example, what are the costs and challenges of carbon capture and sequestration? What are the costs and challenges of renewable power (including backing up intermittent renewable generators)? What are the costs and challenges of nuclear power? What is the cost of doing nothing? Only then can policymakers, industry and consumers make informed choices."
In a recent analysis, consultancy ICF International predicted "a significant shift to renewable, gas and nuclear sources of energy should new carbon legislation be passed by Congress." And that will help trigger robust growth in gas demand that will apply upward pressure on gas prices, the firm said. "New combined-cycle generating capacity will not be economically viable over the next five years, although the timing varies across regions," ICF said.
"Uncertainty has become a constant in the energy industry in the wake of unstable commodity prices, price volatility and looming environmental regulations," said John Blaney, ICF senior vice president.
Nevertheless, if the goal is reducing emissions, natural gas-fired generators are seen as the best bet by many.
Two Rice University researchers are for a transition from coal-fired power to natural gas generators by means of a carbon tax. Dagobert Brito, the Houston university's George A. Peterkin professor of political economy; and Robert Curl, the Kenneth S. Pitzer-Schlumberger professor emeritus of natural sciences and winner of the 1996 Nobel Prize in chemistry, made their recommendation in a recent working paper.
They argue that there are three unresolved questions in the debate on the reduction of carbon dioxide (CO2) emissions. "First, what is the range of prices on carbon dioxide emissions that will be necessary to achieve the desired reductions? Second, should electrical generators and transport fuels be regulated jointly or separately? Third, should the restrictions be in the form of a quantity limit such as cap-and-trade or in the form of a carbon tax?"
Analysts at Barclays Capital noted that the draft CATR includes emissions trading, which as envisioned mainly would take place at the intrastate level, "forcing each state to comply more strictly with its emissions budget."
The Rice researchers calculated the cost of CO2 emissions by modeling the transition from coal-based generation to a system based on gas. Because coal-based electricity generation accounts for about one-third of U.S. CO2 emissions (some 2 billion metric tons), Brito and Curl describe it as "the 900-pound gorilla in the room." Replacing coal generators with natural gas, they believe, "is the most economical way to achieve a target of reducing CO2 emissions by 20%."
While some in the industry bristle when natural gas is called a "bridge fuel" -- they see it as the endgame itself -- the Rice researchers said gas cannot pick up for coal permanently. Development of nuclear and renewable generation will need to continue at a rapid pace, they said.
"Unless or until there is a technological breakthrough in carbon sequestration," Brito and Curl wrote, "the carbon intensity of coal means that 'clean coal' cannot be an important factor in reducing carbon dioxide. Replacing existing coal generation capacity with modern coal generation plants can only reduce total carbon dioxide by 5%."
The authors noted that the efficiency of coal generators is very concentrated. "At current prices for fuels, a carbon price of approximately $30/metric ton (mt) will shut down 10% of coal generator capacity," they wrote. "An additional increase of $15 -- resulting in a carbon dioxide price of $45/mt -- will shut down 90% of coal generator capacity."
The narrow range for the price of CO2 means that coal generator capacity is very sensitive to the price of CO2 emissions. Consequently, small variations can lead to large variations in the amount of electricity supplied by coal generators. The market in CO2 permits could possibly create volatility in the market for electricity.
Because of the risk of high volatility, the researchers said they back a carbon tax to assist the transition from coal to natural gas. They also assert that "it is possible to decouple the pricing of allocations for transportation fuel from the allocations for the production of electricity" because the rise in carbon prices needed to effect the shift in electricity generation would have very little impact on transportation fuels.
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