Vision of green economy includes more gas-fired power, Deutsche Bank

The least-cost approach to cutting U.S. greenhouse gas emissions is for electric utilities to shift as much coal-burning power generation to natural gas as possible, according to DB Climate Change Advisors, a unit of Deutsche Bank.

Yet it's that "least-cost" option for power generation that has kept King Coal on top for so long. Coal has been the cheapest energy around, and state regulators' traditional mandate has been to support cheap power, not clean power.

Deutsche Bank analysts outlined a plan yesterday aimed at cutting coal's share of energy generation from 47 percent to 22 percent in the next two decades. Using more gas, increasing wind and solar power to 14 percent of the energy mix, and adding more nuclear power would achieve a 44 percent reduction in carbon dioxide emissions from the electricity sector in 2030, according to the Deutsche Bank report.

If nothing else, the team of energy investment researchers said their plan puts the United States on a path to meeting President Obama's targeted 17 percent economywide reduction in greenhouse gas emissions by 2020 and 80 percent reduction in 2050.

"The role that natural gas can play we think is so significant that it can form a bipartisan agreement," said Mark Fulton, global head of climate change investment research.


Under the scheme, the share of gas-fired power generation would increase from 23 percent in 2009 to 35 percent by 2030. Underpinning this assumption are trends the analysts contend are more or less fixed at this point.

More regulation, higher prices for coal

U.S. EPA mandates are being phased in to force deeper cuts in air pollutants, for example, increasing the cost of retrofitting or maintaining inefficient 50-year-old coal plants. U.S. EPA regulation of carbon emissions is on the horizon, and incentives for renewable energy development will probably remain in place for another five years.

"We also believe that even the possibility of a carbon price in the next 10 years will cause utilities to want to hedge against this in their generation portfolio," said the report.

In Europe and Asia, coal prices are hitting high marks because of industrial demand, a price for seaborne coal dominated by Asian demand and rail transport issues. That picture is starting to emerge in the United States, where Appalachian coal is limited for domestic use and coal from Montana and Wyoming face rising rail costs and uncertainties about U.S. demand.

The largest coal companies in the nation, Peabody Energy Corp., Arch Coal Inc. and Massey Energy Co., have their sights set on China, India and Japan. An industrial revolution is driving up demand for steelmaking coal in China.

A number of coal-burning power plants that had been licensed and financed in the early part of last decade are just now firing up, so coal is set for a short-term uptick in the United States. But in recent years, as the recession cut into U.S. electricity consumption and as clean air rules began to put pressure on coal use, power companies have shelved lofty plans to expand their coal-fired plants. And dozens of older power plants run on coal will be retired through 2020.

"The reality is that coal generation as we know it today won't be as cheap," said Nils Mellquist, a senior researcher at Deutsche.

Power policy goes to states

It doesn't help that a debate about potential federal solutions to rising greenhouse gas emissions isn't even on the agenda in Congress, said the analysts.

That keeps decisions about fuel use for power generation in the hands of state regulators, which adds to the uncertainty about coal's role.

Public utility commissions "clearly have the keys," Mellquist said. With both state renewable energy mandates and federal clean air mandates in play, burning coal has costs and environmental liabilities that are increasingly factored into the equation by state utility rate regulators.

PUCs, which are either state elected officials or governors' appointees, are making choices about switching from coal to higher-efficiency gas plants. From Colorado to Mississippi, there have been heated debates about operating more gas-fired turbines. Gas has a history of price volatility, and producers face environmental issues in the rapidly developing U.S. gas shale basins.

In the Midwest, where coal dominates electricity generation, state commissions that control public rates are talking more about gas.

Futures contracts put gas in competition with coal

Coal is still cheaper than gas. But if futures contracts for natural gas stay around $6 per million British thermal units, according to the Deutsche analysts, then gas will be competitive with coal if assumptions about electricity prices and energy policy bear out. If not gas, they say power plants should figure to tack an extra 50 percent onto their costs after attaching scrubbers to clean coal emissions.

Total costs are going up regardless, Deutsche said. The yearly cost of delivered electricity is set to increase from $278 billion to $384 billion in 2030.

"The total industry costs of the new fuel mix are manageable," according to the report, "due in large measure to an improvement in utilization of already built natural gas plants."

Deutsche Bank's fund managers argue companies put investors at risk if they don't start cutting emissions. The Frankfurt-based bank has called for international action to spur alternative energy investment. In August, after the Senate shelved a climate bill, Deutsche caused a minor fuss when a top official from its asset management division told Reuters it would shift more of its $7 billion in green investments to Western Europe and China.

Congress, hot off the midterm elections, is in the process of rebuilding coalitions around energy issues.

The Republican takeover of the House and the party's strengthened hand in the Senate could pull natural gas and nuclear power into the foreground.

While there hasn't been a lot of discussion about direct federal incentives for power companies to switch to gas, putting trillions of cubic feet of U.S. domestic gas reserves to use in natural gas-fueled trucks is gaining momentum for consideration before the end of the year.

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