CES Feature Article
 
 

News feature  
Does "King Coal" still reign as the fuel of choice for electric power generation?
For first time in history, power generation from natural gas-fired plants and coal-fired plants are even

From the industrial revolution up until 2011, coal has been the fuel of choice for electric power generation, hence its endearing nickname "King Coal." However, due to the soaring appeal of natural gas, the king just may be dethroned.

 

The evolving nature of risk management The production of natural gas has skyrocketed mainly due to emerging technologies. Horizontal drilling and hydraulic fracturing have allowed drillers to reach reserves in shale formations across America that were formerly thought to be inaccessible. With the increase in domestic supply, the price of natural gas has gone from $13.10 per thousand cubic feet (Mcf) in 2008 to a record low of $1.94 per Mcf this past April. These record-low prices have triggered electric generators and utilities throughout the U.S. to rethink coal in favor of natural gas.

 

Challenging environmental regulations for coal-burning power plants
Coal also has its limits where the environment is concerned. The federal government has enacted tougher rules that require power plants to be more aware of the amount of greenhouse gas emissions produced. Natural gas has long been referred to by the Environmental Protection Agency (EPA) as the cleaner fuel, burning more efficiently and producing fewer pollutants per unit energy released than coal1.

A study conducted by the Government Accountability Office found that coal-burning power plants produce more than 90-times as much sulfur dioxide, five times as much nitrogen oxide and twice as much carbon dioxide as those that run on natural gas2. Sulfur dioxide causes acid rain, nitrogen oxides cause smog and carbon dioxide is a greenhouse gas that traps heat in the atmosphere.

The EPA issued clean-air regulations in the past year that tighten limits on power plant emissions of sulfur dioxide and nitrogen dioxide, and place new limits on mercury - a toxin found in coal. Another rule will limit carbon dioxide emissions from new power plants to 1,000 pounds per megawatt-hour. As these guidelines go into effect, existing coal plants will be forced to invest their time and money in superior pollution-control procedures and equipment, or shut their doors until they can. New coal plants will not be built unless power generators can develop cost-effective ways to capture carbon dioxide.

Natural gas rises as a contender
According to a June 2011 news release, American Electric Power (AEP), one of the nation's largest burners of coal for power plants, is planning to retire 12 sites by 2014 largely due to the cost of meeting environmental rules3. AEP estimated that it will cost between $6 - 8 billion in capital investments through the end of the decade to comply with the new regulations at their still active sites. AEP has already invested $7.2 billion since 1990 on pollution-control projects.

Patriot Coal filed for bankruptcy earlier this July citing that warmer weather and regulations hurt prices, along with lower demand by utilities switching to cheaper natural gas. In the coal mines of Appalachia, companies are reducing their workforce and cutting production. Average operating costs now exceed coal prices for the first time in three years, according to data compiled by Bloomberg Industries4.

The combination of higher compliance costs for coal and lower natural gas prices has compounded the economic incentive for power generators to use natural gas instead of coal. For the first time since the Energy Information Administration (EIA) began keeping records, data shows that power generation from natural gas-fired plants and coal-fired plants are at an even playing field, with each fuel providing 32 percent of total generation5.

With all these factors playing against coal, natural gas is emerging as the energy source of choice with no foreseeable break in its momentum. In its latest forecast, the EIA projected that consumption of natural gas in the electrical power sector will grow by 21 percent in 2012. The trend shows that natural gas accounted for 28.7 percent of total generation during the first quarter of 2012, compared with 20.7 percent during the same quarter last year.

Natural gas price forecasts
In its June report, Credit Suisse analyzed how coal to gas switching will affect gas prices for the remainder of the year. As the price of natural gas increases from its low of $2, the recent gains of five to six billion cubic feet per day (Bcf/d) year-over-year gas will not be sustainable. Gas prices are estimated to remain in the range of $2.50 - 3.00 throughout the summer which will reduce the coal to gas switching rate to 3 Bcf/d.

As long as U.S. weather remains unpredictable, concern for the environment persists, and technology is continuously evolving, it's unlikely that any single energy source will dominate electric power generation for decades at a time. The era of "King Coal" may be coming to its end, but a rollercoaster economy and the high price tag for retooling plants may stabilize its demand or even stimulate a small resurgence. For now though, natural gas is in the best position to become king.

Want to read more? Here are a few sources we cited:

  1. http://www.epa.gov/cleanenergy/energy-and-you/affect/natural-gas.html
  2. http://www.gao.gov/products/GAO-12-545R
  3. http://www.aep.com/environmental/news/?id=1697
  4. http://www.bloomberg.com/news/2012-07-09/patriot-coal-files-for-bankruptcy-protection-in-new-york.html
  5. http://www.eia.gov/todayinenergy/detail.cfm?id=6990

Return to top >>

Unsubscribe

News feature

Bull/Bear Market Summary

Subscribe to market reports

Customer testimonials

 

Quick links

Contact CES

Office locations

NYMEX

Weather.com

Energy News main page

 


Turn to the energy experts
Let the experts at CenterPoint Energy Services help you stay abreast of energy market fundamentals and understand how changes in the market affect natural gas prices. If you would like more information about how your business can benefit from natural gas or if you're interested in receiving other market updates, please contact us via email at CES_Communications@
centerpointenergy.com
or
call 800-495-9880.