Growing competition, tougher rules haunt U.S. coal market — study

By Daniel Cusick | 01/12/2015 08:08 AM EST

The new year will bring continued difficulties for coal-fired electric utilities as new regulations targeting power plant emissions squeeze existing facilities and economics continue to favor inexpensive natural gas over coal for new fossil power generation.

Those are the key findings from the first major energy outlook issued this year from ICF International, one of the world’s largest energy sector analysis and consulting firms.

Among other findings, ICF projects than an additional 62,000 megawatts of coal generation units will be retired over the next two years as a suite of U.S. EPA regulations take effect.

Those rules include the Mercury and Air Toxics Standards (MATS), the Cross-State Air Pollution Rule and the much-anticipated Clean Power Plan targeting carbon dioxide emissions from the electric power sector.

The greatest number of coal retirements are expected in the New England, Mid-Atlantic, Midwest and Southeast power pools, where between 22 and 27 percent of coal-fired capacity is expected to be shuttered by 2030, according to the forecast.

And even with legal uncertainty around MATS, which will be reviewed by the Supreme Court early this year, ICF believes "EPA’s restart of the Cross-State Air Pollution Rule and the march toward a final Clean Power Plan will continue to put pressure on those coal units," according to a press release issued in conjunction with the "ICForecast Energy Outlook" for the first quarter of 2015.

"The regulatory sands continue to shift under generation owners as the planned compliance date for MATS draws closer, leaving little time to modify compliance and investment decisions," Chris MacCracken, principal for ICF International, said in a statement.

More short-term demands, lower supplies

Officials with the Edison Electric Institute, which represents investor-owned power utilities, were unable to respond to ICF’s findings Friday.

In its latest data on coal consumption by utilities, the U.S. Energy Information Administration said power plants consumed 10.3 million short tons over the first 11 months of 2014, roughly 1 percent more than during the same period of 2013.

In the short term, experts said U.S. coal plants will continue to be dispatched for baseload power, despite the fact that coal stockpiles are trending near 10-year lows. The ICF outlook also projects that utilities will have sufficient coal supplies to meet winter demand unless the nation experiences another sustained cold snap or rail deliveries to coal plants become hampered by weather or maintenance issues.

Over the longer term, ICF projects that U.S. coal consumption will remain relatively flat at about 915 million metric tons annually through 2025. That’s because utilities are expected to run remaining coal units at higher capacity factors than before. Domestic coal producers have also placed greater focus on export markets, but ICF forecasts difficult conditions around U.S. exports due to the low global coal prices and stiff competition from other exporters like Colombia and South Africa.

A continued oversupply of domestic natural gas will help keep gas competitive, according to ICF, with Henry Hub spot prices this winter expected to average $4.50 per million British thermal units. That’s more than $1 lower than January 2014, when a wedge of Arctic air sent temperatures plummeting to record lows across much of the country for a number of weeks.

Last week’s cold snap, which affected more than 100 million people in the Midwest, East and South, did not trigger a repeat of last year’s run-up in gas prices, in part because of abundant domestic supplies and ample imports of liquefied natural gas (LNG) to Eastern markets, according to the tracking firm Natural Gas Intelligence.

Stiff competition from natural gas, renewables

ICF said the natural gas market "is entering the new year with decidedly bearish price signals," spurred by a mild December and production rates that continue to outpace demand. Prices will rise and fall due to seasonal price swings, however, and projected demand growth for gas move prices upward in 2016, analysts said.

Gas consumption in North America should increase at a rate of roughly 1.4 percent annually through 2025 to nearly 130 billion cubic feet per day, with the electric power sector accounting for 70 percent of the total increase. Exports of U.S. gas via pipelines to Mexico and LNG terminals on the coasts will also drive up production, according to ICF.

Renewable energy is also expected to see continued expansion through 2030, but the growth will vary depending on a number of factors, including costs of renewable energy and state laws requiring utilities to meet a percentage of their electricity sales using renewable resources.

"Wind and solar technologies will continue to dominate the renewable build mix, but low capacity factors keep their share of total generation nearly constant through 2030, growing slightly in share to 20 percent by 2040," ICF said.

In a separate report, EEI said last week that its members and independent transmission companies invested a record $37.7 billion in transmission and distribution infrastructure in 2013.

Officials said the transmission investment was driven by a number of factors, including the adoption of new technologies for improved system reliability, development of new infrastructure to ease congestion, the interconnection of new sources of generation and support for production of shale gas.

The higher expenditures on distribution lines — which deliver power to homes and businesses — were largely associated with storm hardening efforts and improved system reliability, including underground infrastructure, EEI said.