The US Energy Supply Mix Debate Continues


"Low natural gas prices thanks to hydraulic fracturing and a drop in demand for electricity are having big effects on the use of coal for power generation."

While some Republicans in Congress pound a constant drumbeat about the negative effects of President Barack Obama's "war on coal," a government official had a different take as to why large amounts of coal generation are looking at retirement.

Although environmental regulations have an effect, it is low natural gas prices relative to historic coal prices and drops in electricity demand that are driving the retirements, an Energy Information Administration official said in late June at a Bipartisan Policy Center event in Washington that focused on the EIA's Annual Energy Outlook 2012.

Director of EIA's Office of Electricity, Coal, Nuclear and Renewables Analysis Alan Beamon said that "it's the market forces that are pushing it out of the market," referring to coal-fired generation. He added that "to the degree that it leads to retirements, it is often because these plants are marginal in the first place…It's really the demand situation and the coal price versus gas price that is really making those determinations."

Beamon and other speakers underlined a trend affecting coal that has engendered great discussion around the industry—dramatically low gas prices due to increased supplies accessed by hydraulic fracturing, or fracking. Also, slack electricity demand is playing a huge role in the supply outlook and generation planning, they said.

EIA, a division of the Department of Energy, is described as independent and impartial, and its findings do not require approval by other governmental entities.

Highlighting the uncertainties in demand, regulations and other factors that are driving fuel choices in the industry, Beamon said that five years ago, some companies were trying to sell off their natural gas plants.

"Gas plants are simply cheaper to operate today," Beamon said, noting that the influx of gas is "completely changing dispatch and fuel use in the market." Coal has dropped to about 32% of the market share, about the same as natural gas, which rose from about 20%, he noted.

In 2008 and 2009, EIA saw the first-ever occurrence of two consecutive years of demand drop, he said, adding that "this could have huge implications for this industry." Falling demand "becomes a real challenge, it really changes the industry," he said.

"There are a lot of coal plants out there that aren't running very much, and some not at all," Beamon said. "The economics is what appears to be driving this."

Southern Company Services Vice President of System Planning Jeff Burleson said that the company is taking a "full portfolio approach" to its generation planning.

"We really think that's where the country should be headed," Burleson said. The company plans to invest $20 billion in new resources by 2020, including nuclear, "21st century" coal, natural gas, renewables and energy efficiency, he said.

"We're adding a pretty balanced mix of generation resources," he said, adding that the goal is building "as flexible a fleet of generation resources that we can." However, out of all the fuels, "gas is the one we think has the greatest potential for reliability." Southern does not predict that gas prices will be extremely high or extremely low on a long-term basis, he said, adding that "market forces are going to come into play" and normalize gas prices. Not ignoring the impact of a suite of new Environmental Protection Agency regulations, he said, "it is consideration of all those regulations that come in to bear for those economic considerations for us."

ICF International Principal Chris MacCracken said that as far as the effect on the future generation mix is concerned, "it's a wide range of things, it's not just one or the other policy. . .it's all of the above factored in." He agreed that it is older, smaller coal-fired units that aren't running and are looking at possible retirement.

When it comes to analyzing the future supply mix, "there are a lot of things we don't know, but it does help to test things out," MacCracken said.

EIA officials said that their recent energy outlooks do not account for increased regulation of fracking that might be coming as the drilling method gets more scrutiny from the public and regulators.

Jason Fordney

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