Why King Coal Isn't Dead

The hits keep on coming for the coal industry since my post earlier this week about the “War on Coal”. On Wednesday the Senate voted down Senator James Inhofe’s resolution to scrap the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard, by a vote of 46 yes to 53 no.   

Perhaps the biggest and most surprising news from the Senate's deliberations was a speech by Senator Rockefeller.  The Democrat from West Virginia rebuked the coal industry he represents, and told them to "face reality" rather than blame their troubles on EPA.  It was a powerful, honest speech that you should check out if you have 15 minutes to spare (or check out his editorial). 

The bad news continued for the coal industry on Thursday, as Arch Coal announced 750 job cuts in Appalachia because of lower demand for coal-based electricity.  In other words, it was a decision based on the current comparative economics between coal- and natural gas-fired generation. 

So with all this bad news for coal, is King Coal really dead? Or did natural gas put him on life support and the new EPA rules are the coup de grace.

As I mentioned in my previous post, the proclamations of coal's death - imminent or otherwise - because of natural gas prices and regulations, are overblown.  Coal will remain a significant contributor to our nation's electricity mix for the next 10-20 years. Here's why:

Most of the coal-fired power plants scheduled for retirement in the next five years are older, smaller and inefficient.  That combination makes it harder for utility planners to justify spending millions of dollars on environmental controls to maintain unit operation.  SNL Financial is reporting that announced retirements for 2012-2016 total roughly 21,000 megawatts (MW).  In the scatterplot below, you can see that most of the retiring units are below 300 MW and were built 50 or more years ago.

Many of the plants do not operate at high utilization rates. In total, the retiring units produced just 5% of the total 2011 coal-fired electricity, or approximately 2% of all electricity in 2011.  Not an overwhelming amount.  The real work-horses of the coal fleet are the newer and larger units.  Most of these units already have environmental controls because the units are more efficient and the economies of scale for environmental controls make the projects economically justifiable.  The larger coal plants produce the brunt of coal-fired generation, and will continue to operate in the next 10-20 years.

Just how much coal capacity will remain? The Energy Information Administration’s (EIA) estimates in its Annual Energy Outlook 2012 Early Release takes into account approximately 21,000 MW of coal retirements and estimates that 288,000 MW of coal will remain operational in 2015. 

Historically, EIA’s estimates are conservative and often criticized as such. If we assume 70,000 MW of total coal retirements, as estimated this week by ICF, that leaves us with roughly 240,000 MW of operational coal plants.  That is more than any other type of generation plant. As a comparison, EIA estimates the 2015 natural gas combined cycle capacity at roughly187,000 MW.

Here are some quick back-of-the-envelope calculations showing why coal will still be a significant player in the electricity market:  240,000 MW of coal would produce roughly 34% of our electricity generation in 2015.[1] Under that scenario, the electricity industry would consume about 670 million tons of coal in 2015. [2].[3]

Coal’s market share (and influence) are certainly diminished, but there's a long way to go before "King Coal" is etched into a headstone.

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[1] Assumes a 62% capacity factor based on EIA’s Annual Energy Outlook results.  Forecasted 2015 electricity generation is also based on EIA projections.

[2] Assumes a 10.25 MMBtu/MWh heat rate and an average heat content of 10,000 Btu/lb of coal.

[3] That would be the lowest consumption level since the 1980s. The ICF report, however, finds that coal consumption will remain flat through 2020, which implies the remaining coal units would have a higher capacity factor than the 62% I assumed.