4 Key Reasons Why Coal's 2013 Rebound Will End And Its Decline Resume

With its electricity generation market share collapsing to 37%, coal had a terrible 2012. But coal consumption rebounded 8.8% in the first 6 months of 2013, and more coal will be consumed in 2014 than in 2013, according to EIA.

Though coal is rebounding, will its rise continue after 2014?  Could coal recover significant lost market share and return to the days, when it provided 45% to 50% of America's power?

The answer is no.

In fact, coal's market share will fall below its 2012 low of 37% and possibly as soon as 2015-2016.  Here are 4 reasons why.

First, for coal to recover significant lost market share after 2014, natural gas would need to become expensive, and that is not going to happen.  Coal's market share collapsed from 48% in 2008 to 37% in 2012 mainly because the shale gas boom drove down the spot price of natural gas from $13/mcf to an average of $2.77/mcf in 2012.  The price of gas has recovered modestly in the last 10 months, allowing coal to rebound modestly, but has remained at or below $4.

Second, even before the shale gas boom took off in 2008, natural gas and renewable energy were dominating the new power plant market. Gas plants have low capital costs and renewable energy has low operating/fuel costs.  Those advantages are only getting larger, as the fuel costs of gas plants and the capital costs of renewables both fall enormously compared to 2008. Coal plants, therefore, increasingly cannot compete in the new power plant market.  And that is the case, even before EPA's proposed carbon limits are finalized.  The end result is that new coal plants are not replacing retiring ones.

Third, the median age of coal plants is more than 40 years.  Old coal plants are often inefficient and cannot produce power in competitive power markets at a profit in an increasing number of hours in the year. To make matters worse for the old coal plants, many coal plants do not have the pollution controls to limit mercury and other air toxics that will be required in 2015.  Owners of an old coal plant that is already struggling to break even are choosing to retire them, instead of investing to upgrade them.

Fourth, wind, solar and new renewable energy capacity will add every year at least the equivalent of 40 billion kilowatt-hours of new production, or 1% of the existing power market.  That 1% of new renewable energy production will push out of the market some coal as well as gas generation.  Importantly, the large amount of solar generation that is beginning to flood across America will cut market prices in the hottest hours of the year, reducing important revenue to coal plants and worsening their economics.

The combination of low natural gas prices, large number of coal plant retirements, few or no new coal plants, and booming renewable energy mean coal's rebound will end in 2014.  Then coal's generation and market share will resume declining.