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Power generation in the US, shifting landscape from coal to NG

Historically, the United States which is the world’s largest economy has maintained a significant share in the total global power generation sector. In 2015, its share in the overall power generation stood at 17.6% second only to China, whose share was 24.11%. The analysis of the power industry’s structure in the US, specifically during last two-three decades reveals that the country has seen a major restructuring in terms of the fuels mix to meet its power demand. In 1990, 42.2% of the installed capacity in the US was from coal followed by natural gas (NG), nuclear and other renewable sources, according to the EIA installed capacity data. In the new millennium, the industry has slowly and steadily moved away from coal to primarily natural gas and other resources. This slow deviation was noticed in 2002 when for the first-time natural gas surpassed coal in terms of the share of total installed capacity and contributed 35.9% as opposed to coal which contributed 34.5%. The share of coal decreased to 26.1% and that of natural gas increased to 43.2% in 2015, while among renewable, wind increased to 6% from nearly zero percent in 1990.  

In the present blog, Televisory examined distinct phases of the power generation sector and tried to study the reasons on why and how a shift from coal to natural gas was driven.

In the past decade, coal has lost the position of a predominant power generation source in the US. On the contrary, renewable has been catching up, but coal was substituted by an increasing usage of natural gas. This change is also evidenced by the change in fuel mix for power generation. In 1990, more than half (52%) of the power generation in the US was fuelled by coal which dropped to 33.2% in 2015. On the other hand, the share of natural gas in power generation has increased from 12% (1990) to 32.7% (2015). It was projected in 2016 that for the first time in the history of the US, power generation by natural gas may surpass power generation by coal. 

As the fuel mix has evolved, there has been a decline in coal capacity and a simultaneous increase in natural gas-fired capacity. This decline is also due to coal capacity retirement at an increasing rate. The total capacity retirements during the past 5 years were 80.5 GW out of which coal capacity retirements stood at 53.1%, natural gas 27.7%, while others (renewable and other fossils) were 19.2%. As per EIA forecasts, planned retirements in coal between 2016-20 are on a higher side and it is expected that 17 GW of coal capacity will retire, this is 49% of the total retirements during the period. These retirements are mainly due to the end of life cycle of the plants.

On the other side, planned additions support the shift from coal to natural gas. Coal accounted for only 9% of the new capacity additions of 105 GW between 2011-15. Moreover, the new capacity to be added for coal stands at less than 1GW as per the 2020 projections. The figures show a completely opposite story for natural gas, which contributed 44% in the total capacity additions in 2011-15. This is expected to be 65 GW or 60% for the period 2016-20.

     

Notably, this shift from coal to natural gas has taken place over a long period of time. It was a result of the market responding to lower natural gas prices which made natural gas power generation more economical. Prior to 2000, there was not much difference in the prices of coal and natural gas, but due to the low installed capacity of natural gas-fired plants, power generation from coal was higher. From 2003 to 2008 natural gas prices increased as an effect of higher oil prices, further coupled with an increase in demand for natural gas for power generation. This increased the price gap between NG to coal though the same has declined in last 6 to 8 years. A reduction in the price difference has further favoured the already ongoing capacity expansion for natural gas.

The other factors which favoured NG over coal were its status of a cleaner fuel. The concerns regarding the use of coal in power generation started in the 1980s when it was realised that power plants in the US were exhaling pollutants in air and causing acid rains. In order to address the issue, emissions trading or cap and trade was put in place and was adopted as a law across the nation in 1990. It is since then clean air and environment has been taken seriously. In 2015, total energy-related emissions in the US were 5,271 million MT of which nearly 37% were from the electric power sector. Therefore, looking forward, regulations for controlling CO2 emissions will play a larger role with the advent of Clean Power Plan, that is scheduled to take effect from 2022. As of now, the growing inclination towards natural gas is supported by the necessity to control emissions.

In the first six months of 2016, the energy-related CO2 emissions were 2,530 million MT in the US, which was the lowest since 1990. Thus, it would be fair to acknowledge the benefits of natural gas. In addition, a major question is that if the environment is a major concern, capacity and generation from renewable should have increased. An analysis of the current scenario shows that while investment in renewable is still growing, the pace of growth is very slow due to their high cost of production in the country. The below chart shows LCOE figures for various power technologies which are under implementation and are likely to enter service in 2020-22. 

                                                       Note: total LCOE includes Levelised Tax Credit available for technologies in the renewable space particularly geothermal, wind and solar.

Evidently, natural gas based technology has the lowest levelized cost of electricity (LCOE) combined with low fixed operational and maintenance expense as compared to other fuel based power generating sources. A comparison of the renewable space divulges that NG’s LCOE is nearly same or lower except for geothermal. The LCOE of advanced combined cycle natural gas plants is $57.2/MWh. This is equivalent to LCOE of wind at $56.9/MWh and Solar PV at $66.3/MWh (EIA). Furthermore, with coal being steadily replaced, the next best available and cheaper source of energy generation in the US is natural gas. Additionally, despite renewable capable of providing clean power, there appears to be a shift in the focus towards NG as a bridging fuel, while simultaneously developing the renewable power technologies. There is more investment in capacity additions for natural gas as compared to cleaner fuels, maintaining their position of an expensive source of power generation. Thus, natural gas was supposed to serve as a transition fuel in the process of transformation in the energy sector towards renewable. However, backed by the Shale revolution, it seems that the US has entered a new era, where natural gas is expected to supply energy for the coming decades.

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