America Needs Coal to Ensure Electric Grid Stability

By Chris Hamilton, senior vice president

West Virginia Coal Association

CHARLESTON – Has your electric bill gone up this year? How much?

During his campaign for the presidency in 2008, Barack Obama told a reporter that “under his plan the cost for electricity would necessarily skyrocket” and he made clear his plans to basically make any new coal-fired power plants impossible to construct, saying. “If someone wants to build a new coal-fired power plant, they can, it’s just that it will bankrupt them.”

His words were clear then and they are crystal clear today.

We all know too well that President Obama has moved quickly to implement his goal of ending coal-fired power generation in the United States, but what impact is that having on the nation’s electric grid and, also, what impact is that push likely to have on your wallet?

 

The Background

When Obama took office as president in January 2009, he moved quickly through his EPA and a then-friendly Congress to try to put in place a cap-and-trade system and a regulatory regime that essentially made building new coal-fired plants impossible as well as forcing existing coal-fired power plants to close prematurely.

CoalRetirementsMap figure_13es-lg history-of-energy-consumption Industrial Production  Graph Industrial Production FRB Real GDP from BEA 2006-2012 SNL-Financial top_coal_producing_states-large WorldCoalReserves_p2

Since 2009, U.S. power companies have announced plans to retire nearly 28,000 megawatts (MW) of coal-fired electric generation capacity. Many of those plants have since closed. In 2012, more than 8,800 MW of coal-fired capacity was shuttered and it is expected that in 2014 another 6,000 MW of coal-fired capacity will close its doors.

In this area, 17 coal-fired power plants have either closed or are set to close in the American Electric or First Energy service areas as the power generation companies work to meet the new Obama EPA regulations. As you can see in this map produced by SNL Financial, much of the nation’s total coal-capacity retirements planned are occurring in this area.  In fact, a significant portion of the total MW hours to be retired is occurring along the Ohio River corridor between Pittsburgh and Cincinnati.

The Obama Administration and its friends in the national media have argued that the closure of coal-fired power plants would both aid in the reduction of CO2 emissions and reduce cost to consumers as electric generation capacity was switched to natural gas and renewable. Critics argued, however, that this forced shift would lead to substantially higher electric prices and potentially shortages as the grid struggled to meet the demand.

Over the past year, as these shutdowns have begun to be felt, the arguments of the critics of the Obama Administration’s regulatory assault on coal-fired electric generation have seen their arguments validated as Americans have watched electric bills see double-digit increases and the nation’s power grid be pushed to “voluntary” rolling brownouts to meet demand.

Economic Factors

Between 2007 and 2009, the world’s economy suffered a near-collapse. The result was a significant slowdown in energy demand across the board.  As you can see from the graph below, courtesy of the U.S. Bureau of Economic Analysis, real GDP in the US was in freefall from the end of 2007 through the 2nd quarter of 2009, with economic growth falling to a post-World War II low of a -5 percent from a previous level of a positive 3 percent growth per year.

In conjunction with this loss of GDP, the nation saw its manufacturing sector crumble as durable goods orders fell in pace with the loss of GDP.  This is shown in the following graph of industrial production from 2000 to 2013 provided by the Federal Reserve Board.

Also as a result of this economic decline, we saw demand for energy fall in most of the world, except for the Asian rim nations, such as China and India.  This is noted in the following graph, US demand for energy fell rapidly (graph from the Energy Information Agency)..

At the same time that this was happening, the US was seeing a revolution in the production of natural gas with the development of deep shale gas deposits through horizontal drilling and fracking technology. This resulted in a sudden price shock to the natural gas markets with the price of natural gas falling from highs of $14 per million btu to approximately $1.09 per million btu in just a few years. The rapid decline and supply glut in natural gas combined with the regulatory assault on coal made it appear that switching to natural gas as the primary baseload fuel for electric generation made sound economic sense, however at those levels the price of natural gas was unsustainable in the marketplace. Energy experts put the minimum sustainable market price at approximately $5 per million btu.

It is only common sense to realize that switching to natural gas during a worldwide economic downturn and at a time when there was artificially and unsustainably low prices for the fuel was setting the stage for a major increase in fuel costs for electric generation and higher electric bills for consumers.

Those cost increases are already being felt across the country, but most especially in areas where there has historically been low electric rates due to the availability of coal-fired capacity.

American Electric Power, one of the country’s largest coal-burning electricity generators, said in 2011 it plans to retire nearly a quarter of its coal-fueled generating capacity and that it will spend up to $8 billion to retrofit remaining units to meet regulations that start taking effect in 2014.

“The sudden increase in electricity rates and impacts on state economies will be significant at a time when people and states are still struggling,” AEP Chairman and CEO Michael G. Morris said in a 2011 interview.

While the amount of increase is still uncertain, the Illinois Power Agency has estimated that by 2017 the energy portion of bills could jump 65 percent from what they were in 2011. These estimates are supported by recent EIA data showing that natural gas spot prices averaged $4.71 per million btu at the Henry Hub in January, up $0.47 per million btu from December, the result of bitterly cold weather during the month. EIA expects the price increases of the past few months will reverse at the end of winter. Projected Henry Hub spot natural gas prices are forecast to average $4.17 per million btu in 2014 and $4.11 per million in 2015. Natural gas futures prices for May 2014 delivery (for the five-day period ending February 6, 2014) averaged $4.48 per million btu. At this time last year, the natural gas futures contract for May 2013 averaged $3.46 per million btu.

By contrast, the EIA projects average steam coal prices to remain stable between $2.35 and $2.38 per million btu through 2015. Steam coal has historically been a much more price stable fuel than natural gas.

The result of this recent run up in prices has been a shift by utilities back to more coal. The EIA is projecting coal to increase its electric generation share from 4.1 billion KWH/day in 2012 to 4.4 billion KWH/day in 2015. Meanwhile, EIA projects natural gas utilization to fall from 3.4 billion KWH/day in 2012 to 3.1 billion KWH/day in 2015.

Clearly, even with the intrusion of government regulation on the electric marketplace, the energy markets recognize the need for the ability to shift between fuel loads as market prices dictate. The forced permanent closure of thousands of megawatts of coal-fired power generation removes much of that ability to shift and will result in higher prices for the end-use consumer.

This is particularly true since the EIA also projects a substantial long-term increase in energy demand between now and 2040, from 4.1 trillion KWH annually in 2012 to an estimate 5.3 trillion KWH annually in 2040 – a 23 percent increase over the period.  Without the ability to grow the coal portfolio, the nation will be forced to rely on renewables and natural gas, resulting in further price increases for the end user.

As you can see from the above graph, while the “percentage”of the pie of the electricity market is projected to grow substantially, the actual tonnage demand for coal for electric generation is projected to remain fairly stable even as the market share decreases.

Stability of the Grid

Electric price inflation is not the only concern with locking in increased dependency on natural gas. Unlike coal, which can be stockpiled easily at the utility, natural gas supplies are dependent on limited pipeline capacity or potentially dangerous high pressure storage facilities. The potential for grid failure is exponentially increased by reliance on natural gas.

Three times over the past seven months, PJM Interconnections and their constituent companies such as Appalachian Power and First Energy have requested consumers participate in what they refer to as “voluntary demand response” – which is essentially a rolling “voluntary brownout” for institutional users such as schools, hospitals and other large facilities —  in order to reduce overall power demand in the face of a shortfall in supply in order to avoid a wholesale blackout of segments of the grid.

Clearly the grid’s capacity is pushing its limits and this is happening despite the continuing economic uncertainty and decreased electric demand. Removing additional coal-fired capacity will only worsen this situation and endanger the stability of the entire grid.

Prescription for the Future

We believe, as we have said for the past six years, that it should be the marketplace rather than the government that determines the energy mix based on market drivers such as price and reliability. We believe that permanent, forced retirement of thousands of megawatts of coal-fired capacity is a mistake that will result in higher prices for consumers, hurt our manufacturing competitiveness and potentially push the nation back into recession.

We further believe it is in the nation’s best interest to take the steps needed to make our energy mix as nimble and diversified as possible – with coal-fired capacity remaining the primary fuel for our electric needs due to its reliably stable low price combined with our ample domestic supply.

The current policies pursued by the Obama Administration and the EPA are irresponsible and destructive of our national energy security.  They are based on, we believe, intentionally unachievable standards with the intent of shutting down coal-fired electric generation.

We believe further, that a proper standard would be to use the emissions profile of the 5 or 10 most efficient current coal-fired power plants as the standard for new plants and grandfather in existing plants, providing them a more realistic timeframe for retrofitting or retirement without endangering the grid.

America is positioned to reassert true energy independence. In order to do so, we must make the fullest and best use of all our resources, including oil, natural gas, renewable and most importantly coal.  Taking coal out of the energy mix is essentially robbing ourselves of this opportunity to gain energy independence and, with it, rebuild our nation’s economy.

West Virginia’s coal industry stands ready to lead. We have the best coal miners, management, engineers, environmental technicians and support in the world. We also have some of the best quality reserves available.  We are ready to do our part to rebuild our nation’s economy and put our people back to work. All we ask is for the federal government to allow us to do our jobs and mine coal.

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