Friday, July 19, 2013

EIA Says Coal Supplying 40% Of Power May Be The New Normal: Is EIA Right?

EIA yesterday said something that is worth repeating, because it has big implications if right:

"Coal has continued to fuel about 40% of total generation over the past five months. This is up from a low of 32% in April 2012, when natural gas prices were near 10-year lows. However, as recently as November 2008, coal accounted for 50% of total generation. The favorable supply and price picture for natural gas, and to some extent the increased penetration of renewable power, appears to have created a new, lower normal for the coal share of the power market."

Is coal providing 40% of electricity generation the new normal?  And what does that mean if EIA is right?

My sense is that coal will provide around 40% of America's power for the next two years. New renewable capacity is enough to meet annual incremental load growth but not enough to displace coal. Nuclear generation will not increase significantly in the next two years and will not displace coal. Only natural gas is a threat to existing coal generation market share and the price of natural gas is unlikely to fall below $3.50, the price point at which gas would begin to push coal below 40%.

So EIA is likely right to call coal providing 40% of electricity supply the new normal--at least for the next two years.  And one result is that US carbon emissions will probably climb in 2013 and 2014, compared to 2012 total emissions of 5.29 billion tons.

But will coal still provide 40% of US electricity generation from 2015 to 2023? Almost certainly not would be the answer.

Coal-fired power plants will do well to keep producing at their 2014 level, starting in 2015 and through 2023.  Yet, if they maintain their electricity production at 2014 levels, coal generation's total market share will fall to about 35%, simply because the electricity consumption is expected to increase on average 1% per year over the next decade. That decline in market share, however, would not lower total carbon emissions, because it would result from expanding total electricity consumption and not decreasing total coal-fired electricity.

To produce a decline in carbon emissions, coal-fired electricity generation itself will have to fall, and its market share would have to be lower than 35% by 2023, assuming electricity consumption averages a 1% per year increase over the next 10 years.  Will that happen?  The answer is far from clear and will hinge heavily on the price of natural gas, whether electricity sales do average a 1% increase per year, and policy developments.

To sum up, coal providing 40% of total electricity production is likely to be the new normal for the next 2 years but not from 2015 to 2023.  Coal, however, can lose market share without decreasing total coal-fired generation, simply because the size of the electricity market or electricity sales probably will increase 1% per year.  Coal generation will decline from current levels from 2015 to 2023 only if natural gas displaces it. Whether natural gas will do that depends both on the price of gas and policy developments.

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