Friday, February 21, 2014

Retirement Of 20% Of The US Coal Fleet May Not Mean A Decline In Coal Power Production

The Energy Information Administration's 2014 Energy Outlook projects that 60,000 megawatts of coal-fired generation, or nearly 20% of the total, will retire by 2020 and very little more thereafter.

Interestingly, the EIA forecast of coal retirements is considerably higher than the approximately 40,000 megawatts generation owners have so far reported will be retired. As of 2013, less than 20,000 megawatts of coal capacity had actually retired.

Yet, even if one assumes that the EIA forecast is correct and that 60,000 megawatts of coal-fired generation retires by 2020, the total amount of coal-fired electricity generated may not fall by a substantial amount as a result of the retirements.  Why?

Many coal plants that are not going to be retired have relatively low capacity factors. Indeed, the average capacity factor of the coal fleet in 2012 was just 56%. As a result, many of the coal plants that will not retire can and will produce more electricity and replace some of the power that the retired coal plants once produced.

Two factors will substantially determine whether coal plant retirements actually lead to less coal-fired power production. The price of natural gas and whether electricity demand rises or falls will directly impact whether the large amount of remaining coal-fired capacity runs more often and longer.  Right now, these two factors are pushing coal-fired electricity output in different directions.

Electricity demand is shockingly forecasted to actually fall through 2016 in the Midwest and is soft in other areas, as a result of the energy efficiency and distributed solar revolutions. Lower power demand will push downward both coal-fired and natural gas generation.

While softening demand is bearish for coal generation, rising natural gas prices is bullish for coal power. In fact, if natural gas prices remain above $4 for a thousand cubic feet, coal plants are going to run more and displace gas plants, as they have been doing recently.

The bottom line is that the large, coal retirements that will take place in the next few years do not mean falling coal-fired electric output.  It is quite possible that the remaining coal plants that constitue 80% or more of today's coal fleet will run more often and longer.   And so, in some cases, coal could replace coal.

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