I try my best to ignore the political rhetoric and fallacies
that are so pervasive inside the DC Beltway, but this time I cannot.
You know the routine: a representative from one political party says something – doesn’t
matter if it’s divisive or innocuous – about an issue, which elicits an adamant
rebuttal from the opposing party. Mix in
a hefty portion of disinformation, sprinkle with some sugarcoated facts, turn
the spin cycle on high, and throw in the suffix “-gate” for good measure. Then repeat
the process as necessary indefinitely.
In an interview last week, EPA Administrator Lisa Jackson cited low natural gas prices as the culprit behind
coal’s struggles, and said: “
So in my opinion the problem for coal right now is entirely economic.” Senator James Inhofe (R-OK) fired off a
letter to Jackson, criticizing
her comments and blamed EPA for the coal industry’s struggles. (
I'm looking for a link to the letter that does not reside behind a pay-wall, and will post it as soon as I find one). Inhofe suggested that Jackson substitute her
“judgment for that of qualified corporate planners.”
Since I consider myself one of those qualified corporate
planners – having worked at one of the nation's largest electric utilities (and coal consumer) doing economic analyses for environmental compliance and power
plant retirement decisions – I thought it would be good for me to the evaluate the latest
spat in the enduring battle between Inhofe and EPA.
Before sizing up their arguments, let me first digress and
channel Mark Twain to say that the reports of coal’s death are greatly
exaggerated. I will substantiate this
statement in a future blog post, but in my opinion, coal will remain a
significant contributor to the nation’s electricity mix for at least the next
10-20 years despite the challenges the industry currently faces.
So back to the action: who’s right? Is it natural gas prices or EPA
regulations that are putting the pressure on the coal industry?
Assessing Lisa
Jackson’s Assessment
In an interview with Grist last week, Lisa Jackson described
coal’s problem as being “entirely economic.” Technically, Administrator Jackson’s
statement is correct. The comparative economics between coal and natural gas clearly
favor natural gas in both the “short-run” and “long-run” (
definitions for
non-econ wonks). Jackson’s statement, however, is misleading
because it implies that natural gas prices are the root cause. Yes, natural gas prices are the predominant
factor affecting the viability of coal plants, but regulations play a role as
well.
Here is why: prior to the new environmental regulations,
electricity planners had three basic options for their “uncontrolled” (i.e. without
environmental controls) coal power plants. The options were:
- Continue to operate the coal plant without environmental controls
- Continue to operate the coal plant and invest in environmental controls
- Retire the coal plant and replace with a new power plant or purchase replacement generation
The goal of electricity planners is to minimize total costs,
and therefore in the absence of environmental requirements, they would tend to
pick Option 1 – as long as the plant is in good working condition and its
revenues exceed its costs. This is
because Option 1 already has
sunk costs (the power plant itself), while Options
2 and 3 require significant capital investments.
The adoption of new environmental regulations changes the
evaluation because Option 1 is non-compliant and is therefore no longer viable. Electricity planners are left with two basic
options: control the plant or retire it. The low cost of natural gas power
plants and fuel coupled with the age and efficiency of uncontrolled coal plants
make retiring coal units (Option 3) an attractive economic option. So technically Lisa Jackson is correct, coal’s
issue is an economic one, but part of the reason is because the regulations are
changing the equation.
Senator Inhofe “killing”
it?
Although Senator Inhofe clearly believes regulations are a
significant problem for the coal industry, he opened his letter to Lisa Jackson
by subtly admitting abundant natural gas plays a role in the problems facing the
coal industry. He then claims Jackson’s statement “distorts economic realities.” Ironically, Inhofe’s letter is also guilty of
distorting reality.
Inhofe’s letter notes that Jackson’s assessment contrasts’
starkly with comments from EPA Region 1 Administrator Curt Spalding. At first read, I was shocked by Spalding’s “comments”
because I thought Inhofe had found the smoking gun proving an active conspiracy
at EPA to “kill” the coal industry. Here is the excerpt from Inhofe’s letter I
found shocking: “…Spalding who openly admitted that EPA regulations, are in
fact, killing coal and that EPA consciously and deliberately made the decision
to do so… In his recent comments to a Yale University gathering caught on tape,
Administrator Spalding said…”
Then I read Spalding’s comment and watched the video of his
talk at Yale (provided by Inhofe,
watch here).
Instead of seeing some grainy footage of
a flippant Spalding making disparaging remarks about the coal industry, I saw an
honest assessment of how difficult it was for the EPA to make the regulations,
especially when accounting for the potential impacts on people and communities.
Spalding never mentioned “killing”; the insinuation and emphasis was all Inhofe’s.
The letter later stresses the need to take “company
statements regarding the motivations for plant closures seriously,” and
cites FirstEnergy’s decision to retire about 2,700 megawatts of coal-fired generation
because of environmental regulations. FirstEnergy is an excellent company, but I found their decision peculiar, and I
am not convinced that environmental regulations are the sole cause of the
retirements.
The compliance deadline for the new Mercury and Air Toxics
Standards is mid-2015. If the
environmental rules were to blame for the retirements, why would they shut the
plants down in September 2012 rather than run the units up until the compliance
deadline? The reason is economics, and
supply and demand.
Many of the units slated for retirement are older, smaller
and inefficient (although surprisingly, there were a few younger, larger units
on the list). The units are likely
uneconomic or marginally profitably to operate today. Without access to FirstEnergy’s analysis, the
simplest way to assess the value of the units is to look at their recent
capacity factors.
[1] A high capacity implies the unit is cheap to operate
and valuable, while a low capacity factor means a unit is marginal and more
expensive to operate. Several retiring units operated at low capacity factors
the last few years (see graphs below) due to increased competition from natural
gas units, and decreased electricity demand from the recession. The low capacity factors are a result of
economic dispatch, not environmental regulations.
The supply and demand of power plant capacity is the other potential economic driver behind FirstEnergy’s decision to retire the units
earlier than the compliance deadline. FirstEnergy’s remaining fleet suddenly
becomes more valuable by retiring megawatts early and creating capacity
scarcity. In
PJM’s May capacity auction, capacity prices in FirstEnergy’s region cleared at
$357MW/day compared to $167 MW/day for the remainder of the PJM market.
Like Jackson’s comments, Inhofe’s letter is misleading and
does not tell the entire story. It is evident that Inhofe’s letter is fraught
with manipulative statements, and how powerful his (and the coal industry’s)
use of terms like “war” and “killing” can be.
Unfortunately, most people do not have industry experience or the time
to dig through articles, videos, and transcripts to find truth in the
debate.
They are both right…
and wrong
So who is right? In
my opinion, Administrator Jackson and Senator Inhofe are both right, and wrong.
Low natural gas prices, lower
electricity demand, and environmental regulations are all contributing to coal’s
struggles. But natural gas is the
predominant factor, not the EPA’s rules (this conversation does not happen if
natural gas prices were $8/MMBtu instead of $2.50/MMBtu).
Is there middle
ground?
On Wednesday, Senator Inhofe intends to bring the
Congressional Review Act to vote. The ACT attempts to provide the coal industry
relief by striking down EPA’s new Mercury and Air Toxics Standards. In my opinion, that’s harsh move. Instead I’d
support the reasonble alternative measure set forth by Sen. Lamar Alexander
(R-TN) and Sen. Mark Pryor (D-AK) to move the MATS compliance date from 2015 to
2018. The compromise would give the
electric sector, affected communities and associated industries the ability to
spread out their investments, and provide enough time to transition away from
coal.
Here is to hoping cooler heads prevail.
Additional Reading:
[1] Capacity
factor is the ratio of actual output from a power plant compared to its
potential output if it were to run at full output.
