Western Energy — Fall 2012
Change Language:
The Phenomenon Of Coal-To-Gas Switching
By Gordon Pickering, with assistance from Gary Belter, Ed O'Toole, Li Wang and Jeff Van Horne, Navigant
It seems that these days, the industry trade press and public news sources are all reporting on "coal-to-gas fuel switching." So, what is the current fuel switching buzz really all about? Coal-to-gas switching occurs for two primary reasons, both related to lower natural gas prices relative to coal. First, in the near term, natural gas fleets can increase their utilization by ramping up idle capacity in order to displace more expensive coalfired generation.
Second, in the longer-term, natural gas generation can replace retiring coal-fired generation capacity. In both cases, the drivers are environmental regulations and the relative costs of the two fuels. Navigant's analysis indicates that short-term, coal-to-gas switching has resulted in an average of about 6 billion cubic feet per day (Bcfd)1 of extra natural gas consumption during the first half of 2012 versus the first half of 2011. This represented about 8.4 percent of the total U.S. gas market during the first halfof20l2. Navigant believes that natural gas will rise moderately in the future, causing the short-term displacement of coal by gas to diminish slightly. However, with about 48 gigawatts (GW)2 of coal capacity expected to retire between 2011 and 2017, long-term average displacement of coal-fired with gas-fired generation, due to the retirements, is expected to be about 4-to-5 Bcfd.
It is also important to note that expected retirements will not be evenly distributed around the country, but mainly expected in the Mid-West, Mid-Atlantic, and the Southeast regions. Coal plant retirements will impact the West, but to a much lesser Degree primarily because the region is less dependent upon coal generation than others across the country. Coalfired plants make up 21 percent of total capacity in the Western Energy Coordinating Council (WECC) NERC3 region versus the Reliability First Corporation (RFC) NERC region in the Great Lakes area, where 46 percent of the electric capacity is provided by coal-fired power plants.
Thus, when speaking of coal-to-gas switching for the purposes of this article, one or both of the following are generally being referred to: Displacement of coal-fired generation by n a t u r a l gasfired generation due t o s h o r t - t e r m fuel p r i ce c o m p e t i t i o n. Historically, natural gas has been more expensive than coal and as a result, coal plants have been dispatched to meet electrical demand before natural gas plants. Over the last few years, worldwide coal demand has pushed coal prices up, while the development of shale gas in North America has pushed domestic natural gas prices down. As a result, coal prices have become higher than gas prices in several markets.
Retirement of coal-fired capacity and replacement w i th natural gas-fired capacity. In these instances, older, less-efficient coal plants are retired and, where necessary for reliability, are replaced with natural gas-fired power plants.
Coal-to-Gas Switching Based on Fuel Costs
The first driver behind coal-to-gas switching is the relative cost of natural gas versus coal. Figure I indicates the historical prices of these two commodities. The comparison shows historical natural gas prices at Henry Hub, Louisiana, (the primary reference hub for U.S. national natural gas prices and the delivery point for the NYMEX futures contract) versus weighted average U.S. coal prices. Historically, there has been a wide gap between the prices of the two fuels, with natural Gas being significantly higher priced on an energy equivalent basis. The gap narrowed considerably beginning in 2009, and in 2012, the cost of the two fuels has converged. Coal prices have been trending higher in recent years as world demand for coal has grown, and the cost of mining coal in the eastern U.S. has increased. At the same time, the transforming force of unconventional shale gas has continued to push natural gas prices down due to continuing supply growth and drilling efficiency improvements that are lowering the costs of production. Shale gas was always known to exist in many areas, but as Navigant first reported in 2008,4 it was largely undeveloped until just a few years ago. The cost and effectiveness of horizontal drilling and hydraulic fracturing have improved to the point where the long-term price of gas is projected to remain stable, and the absolute price will remain low for the foreseeable future as price volatility will be significantly diminished in the new, North American gas market environment.
Coal and Natural Gas Prices
While coal and natural gas prices converged on a national level in 2012, regional differences in fuel prices, combined with the regional distribution of coal plants, are resulting in more pronounced impacts of coal-to-gas competition in some regions of the country.
Figure 2 shows the general location of many of the nation's coal-fired power plants, while Figures 3 and 4 highlight the price differences between coal and gas at the key, associated price points for the Appalachian Basin and the Powder River Basin. Figure 2 shows that the vast majority of coalfired generation is located east of the Mississippi River, near or conveniently served by supplies of Central Appalachian coal.
U. S. Coal-Fired Power Plants
In most of the eastern region of the U. S., natural gas is now cheaper than coal. Figure 3 shows historical prices for the Dominion natural gas hub in £ I £= '2H! Northeast Coal vs Gas Prices • Central App Coal Dominion Gas Figure 3 Pennsylvania and Central Appalachian coal in West Virginia, Pennsylvania and Ohio, along with the NYM EX futures for both these commodities over the next three years.5 As illustrated, the price advantage for natural gas is expected to remain in place through the end of 2014 — and perhaps longer — based on the NYMEX prices during the first two weeks of August 2012.
Appalachian Coal and Gas Prices
The outlook for coal generation in the Mid-West and Mid-Atlantic is impacted by the fact that they are among the oldest and least-efficient plants in the country. The average heat rate, defined as the heat input required to generate one kWh of electricity, is greater than 11,000 Btu for coal-fired plants in this area. A new, efficient combined cycle gas power plant only requires around 7,000 Btu to generate one kWh of electricity. Adjusting for these heat rate differentials contributes to the price advantage in favor of natural gas generation, and is included in the price charts. Of course, there will be a wide variation in the efficiencies and delivered fuel costs for both coal and natural gas power plants, so not all coal generation will be displaced at the same time. Additionally, the vast majority of coal plants purchase coal under longterm contracts, and thus not all plants are immediately exposed to the full impact of price fluctuations.
While coal generally has maintained its price advantage relative to natural gas in the western U.S., the overall coalto- gas switching phenomenon has not been affected due to regional factors.The most prolific coal basin in the U.S., producing about 40 percent of U.S. coal, is Wyoming's Powder River Basin.The historical relationship between Powder River Basin coal and Colorado Interstate Gas (CIG) is shown in Figure 4. Natural gas has been less expensive than coal in the western states by a smaller margin and for a shorter time than in the eastern U.S.; and it currently is not cheaper than Powder River coal. Despite the high volume and low price of Powder River Basin coal, it has not impeded significant coal-to-gas switching in the U.S. for two main reasons: First, because only 10 percent of the coal-fired power plant fleet is located in the western U. S., near the Powder River Basin.second, because the Powder River Basin coal is sub-bituminous coal, which is "less desirable" than Appalachian "metallurgical" coal due to its lower heat content. Thus, the eastern U.S. is effectively the key competitive battleground area for coal and gas competition and, more recently, for switching.
Western Coal and Gas Prices
The low cost of natural gas in the eastern U.S. relative to the cost of coal is the main reason U.S. coal-fired generation dropped an average of 28.5 terawatt hours (TWh) per month,6 or 20 percent d uring the first half of 2012, compared to the first half of 2011. At the same time, natural gas generation increased by 25 Twh/month7 or 34 percent. The changing mix for electric generation between coal and natural gas over the last three years is illustrated in Figure 5. The displacement of coal-fired generation with gas-fired generation has amounted to an average of about 6 Bcfd, with the majority of the switching occurring in the RFC and SERC Reliability Corporation8 NERC regions..
Average U.S. Electricity Generation 2010-2012
It is important to note that many of the coal plants currently reducing output due to low natural gas prices are the same coal plants scheduled for retirement. So, in one sense, coal-togas "switching" will continue on a more permanent level, due to replacement of the retiring coal-fired capacity, even Though short-term switching based solely on fuel prices should decrease. Following this pattern, as natural gas prices trend moderately upwards towards what Navigant believes is the fuel's natural long-term sustainable price range of $4 to $6 per MMBtu, and depending upon fluctuating coal prices, the recent discount of natural gas prices to coal prices may disappear. Only time will tell. What we do know is that the 48 GW of coal plant retirements expected between 2011 and 2017, are apt to put downward pressure on coal prices. Nevertheless, the recent proliferation of shale gas production should ensure that coal and natural gas prices remain in close proximity to one another.
As can be seen in Figure 6, the Marcellus shale deposit lies underthe heart of U.S. coal country, and it will drastically change natural gas flow patterns and prices in a region that has traditionally imported the majority of its natural gas. It has been estimated that the Marcellus shale has total recoverable reserves exceeding400 Tcf, and estimates continue to rise as the development of the shale continues. Some of today's estimates are close to double the estimate in Navigant's 2008 North American Natural Gas Assessment completed for the American Clean Skies Foundation, where Navigant first identified the rapidly expanding development of natural gas from shale gas resources.9 Furthermore, the Marcellus overlaps a portion of the Utica shale, which is still in the early stages of exploration and could contain even more natural gas than Marcellus. So, the ability of natural gas to compete head-on with coal for the long term appears certain.
Displacement of Coal Capacity
While fuel cost is the main driver of the first type of coal-to-gas switching, it is only one part of the reason why the retirement of old, coal-fired generation units is occurring. The Environmental Protection Agency (EPA) has issued several rules that will significantly impact the operation of the coal-fired power plant fleet, which currently constitutes more than 30 percent of the electrical generation capacity in the U.S. The most significant of these rules are the Mercury and Air Toxics Standards (MATS) and the Cross State Air Pollution Rule (CSAPR). MATS, formerly known as the Maximum Achievable Control Technology, set emission limits on mercury and other toxic pollutants from power plants. As the rule does not allow for trading of credits between plants, owners cannot over comply at one site and leave another without controls. Coal plants have until April 2015 to comply with MATS, with individual states able to grant an additional year if needed. The timeline can be extended to a fifth year in exceptional circumstances where a unit is required for reliability.
CSAPR was designed to meet the requirements of the Clean Air Act and the Regional Haze Rule. The Clean Air Act requires EPA to control Nox and S02, as well as particulate matter. The Regional Haze Rule was designed to limit emissions that degrade visibility in national parks and wilderness areas. Under CSAPR, a pollution limit or budget was set for each state that contributed significantly to a Downwind state's pollution problems. The agency also adopted a cap-andtrade approach that would allow intrastate and limited interstate trading of emissions allowances, but also set hard limits on how much each state could emit.
On Aug. 21, 2012, the U.S. Court of Appeals for the District of Columbia Circuit vacated CSAPR, finding that EPA went beyond the scope of its authority. In the meantime, the Clean Air Interstate Rule (CAIR) remains in effect until a successor program can be developed. The fact that the court left CAIR in place while the EPA comes up with a replacement for the rejected CSAPR standards "is a good indication that some standards will continuously be in effect." Retirements are expected to occur over the next few years — to meet MATS — primarily in the RFC and SERC NERC regions. Actual and announced retirements by year are shown in Figure 7. The disparity of retirements across the country is shown in Navigant's estimate of total retirements, including both actual and announced retirements, and estimated unannounced retirements, illustrated in Figure 8.
Projected Coal Retirements From 20II by NERC Region (GW)
Using our Coal Retirement and Retrofit Model, Navigant projects a total of 48 GW of coal-fired power plant retirements from 2011 through 2017.This figure contains about 16 GW of retirements beyond those that have Been announced, almost 2 GW of announced retirements in the Pacific Northwest, and I GW of announced retirements in Texas that are scheduled to occur beyond the next five years. The main drivers of retirements are the relative prices of coal and gas as power generation fuels, and the potential capital costs to retrofit power plants to meet plant-specific environmental requirements such as those of MATS. As indicated in Table I, most of the units that have announced retirement Are older (great than 50 years in service), smaller (by 46 percent) and have lower utilization (42 to 63 percent) than the nation's coal fleet as a whole. In today's new environment, with natural gas competitive with coal as a power generation fuel, the economics don't support pouring retrofit money into such plants when they can be replaced with more efficient, natural gas-fired generation.
Retiring Coal Generation Comparison
Even though CSAPR would not have impacted the western states, the Regional Haze Rule will affect them. There are currently approximately 4 GW of announced retirements in the West, but this number could grow based on the recently released implementation plans to meet the Regional Haze Rule. Recently, the EPA reviewed State Implementation Plans or issued Federal implementation plans for coal plants in Arizona, Nevada, Utah, New Mexico, Colorado, Wyoming and Montana. The plans could impact an additional I Gwof operating capacity that is not currently announced for retirement. Retirements of 5 GW throughout the West would account for less than 3 percent10 of total, regionwide generation capacity Or up to 0.5 Bcfd of natural gas demand. The impact of coal retirements on the West, in contrast to other areas of the country, will likely be minimal.
In most instances, power plant owners consider their alternatives before announcing final retirement plans. The lack of a state-level rule (like CSAPR) in the West to address the Regional Haze Rule has resulted in specific equipment being proscribed on a plant-by-plant level. It has been Speculated that the repeal of CSAPR in the East may drive a similar, plantby- plant approach in those states, with all reductions to be achieved at a plant level and without emissions trading to mitigate retirements, unlike CSAPR. This could cause far more retirements than currently estimated by Navigant under the CSAPR Rule.
As a result of the realignment of coal and natural gas fuel prices, and the costs of emissions allowances or mitigation, there recently has been a significant amount of substituting natural gas-fired for coal-fired electric generation. Short-term economic switching likely has amounted to more than 6 Bcfd of incremental natural gas consumption this year versus last. While such fuel substitution would likely diminish as natural gas prices return to a more equilibrium-type level of $4 to $6 per MMBtu, economics still indicate switching from coal to gas in the longer-term, but in the context of the replacement of coal-fired generation capacity by natural gasfired generation capacity. Due to the competitive natural gas prices that are expected to result from the new environment of shale gas abundance, along with the capital expenditures for upgrading coal plants that are likely to be necessary as a result of environmental policies, significant amounts of existing coalfired generation capacity is expected to retire over the next five years, creating a long-term bump in natural gas consumption estimated at about 4 Bcfd
This sizable volume of new natural gas demand will help support the country's expanding dry natural gas production base that has, over the past few years, grown by about this same volume annually and which, at this point, is about 65 Bcfd. Coalto- gas switching will continue to be an important market phenomenon over the medium term, as coalfired power plant retirements wind down. Meanwhile, new markets for natural gas, such as LNG exports and possibly industrial demand, will help sustain the ongoing development of the country's abundant, clean and inexpensive shale gas assets.
Gordon Pickering
director, Navigant Consulting - Energy, is the co-leader of Navigant's North American natural gas consulting practice. He has more than 30 years of energy industry experience in the natural gas and power industries in both the United States and Canada. For the last 10 years, he has been employed by Navigant in Sacramento, Calif. Most recently, he has directed Navigant's industry leading efforts assisting LNG export projects filing for non- FTA approval before the DOE. Mr. Pickering also has been very involved with gas shale developments in North America and its impacts on the market, and is a frequent speaker on gas topics across North America. Gordon can be reached at gpickering@navigant.com
It seems that these days, the industry trade press and public news sources are all reporting on "coal-to-gas fuel switching." So, what is the current fuel switching buzz really all about? Coal-to-gas switching occurs for two primary reasons, both related to lower natural gas prices relative to coal. First, in the near term, natural gas fleets can increase their utilization by ramping up idle capacity in order to displace more expensive coalfired generation.
Second, in the longer-term, natural gas generation can replace retiring coal-fired generation capacity. In both cases, the drivers are environmental regulations and the relative costs of the two fuels. Navigant's analysis indicates that short-term, coal-to-gas switching has resulted in an average of about 6 billion cubic feet per day (Bcfd)1 of extra natural gas consumption during the first half of 2012 versus the first half of 2011. This represented about 8.4 percent of the total U.S. gas market during the first halfof20l2. Navigant believes that natural gas will rise moderately in the future, causing the short-term displacement of coal by gas to diminish slightly. However, with about 48 gigawatts (GW)2 of coal capacity expected to retire between 2011 and 2017, long-term average displacement of coal-fired with gas-fired generation, due to the retirements, is expected to be about 4-to-5 Bcfd.
It is also important to note that expected retirements will not be evenly distributed around the country, but mainly expected in the Mid-West, Mid-Atlantic, and the Southeast regions. Coal plant retirements will impact the West, but to a much lesser Degree primarily because the region is less dependent upon coal generation than others across the country. Coalfired plants make up 21 percent of total capacity in the Western Energy Coordinating Council (WECC) NERC3 region versus the Reliability First Corporation (RFC) NERC region in the Great Lakes area, where 46 percent of the electric capacity is provided by coal-fired power plants.
Thus, when speaking of coal-to-gas switching for the purposes of this article, one or both of the following are generally being referred to: Displacement of coal-fired generation by n a t u r a l gasfired generation due t o s h o r t - t e r m fuel p r i ce c o m p e t i t i o n. Historically, natural gas has been more expensive than coal and as a result, coal plants have been dispatched to meet electrical demand before natural gas plants. Over the last few years, worldwide coal demand has pushed coal prices up, while the development of shale gas in North America has pushed domestic natural gas prices down. As a result, coal prices have become higher than gas prices in several markets.
Retirement of coal-fired capacity and replacement w i th natural gas-fired capacity. In these instances, older, less-efficient coal plants are retired and, where necessary for reliability, are replaced with natural gas-fired power plants.
Coal-to-Gas Switching Based on Fuel Costs
The first driver behind coal-to-gas switching is the relative cost of natural gas versus coal. Figure I indicates the historical prices of these two commodities. The comparison shows historical natural gas prices at Henry Hub, Louisiana, (the primary reference hub for U.S. national natural gas prices and the delivery point for the NYMEX futures contract) versus weighted average U.S. coal prices. Historically, there has been a wide gap between the prices of the two fuels, with natural Gas being significantly higher priced on an energy equivalent basis. The gap narrowed considerably beginning in 2009, and in 2012, the cost of the two fuels has converged. Coal prices have been trending higher in recent years as world demand for coal has grown, and the cost of mining coal in the eastern U.S. has increased. At the same time, the transforming force of unconventional shale gas has continued to push natural gas prices down due to continuing supply growth and drilling efficiency improvements that are lowering the costs of production. Shale gas was always known to exist in many areas, but as Navigant first reported in 2008,4 it was largely undeveloped until just a few years ago. The cost and effectiveness of horizontal drilling and hydraulic fracturing have improved to the point where the long-term price of gas is projected to remain stable, and the absolute price will remain low for the foreseeable future as price volatility will be significantly diminished in the new, North American gas market environment.
Coal and Natural Gas Prices
While coal and natural gas prices converged on a national level in 2012, regional differences in fuel prices, combined with the regional distribution of coal plants, are resulting in more pronounced impacts of coal-to-gas competition in some regions of the country.
Figure 2 shows the general location of many of the nation's coal-fired power plants, while Figures 3 and 4 highlight the price differences between coal and gas at the key, associated price points for the Appalachian Basin and the Powder River Basin. Figure 2 shows that the vast majority of coalfired generation is located east of the Mississippi River, near or conveniently served by supplies of Central Appalachian coal.
U. S. Coal-Fired Power Plants
In most of the eastern region of the U. S., natural gas is now cheaper than coal. Figure 3 shows historical prices for the Dominion natural gas hub in £ I £= '2H! Northeast Coal vs Gas Prices • Central App Coal Dominion Gas Figure 3 Pennsylvania and Central Appalachian coal in West Virginia, Pennsylvania and Ohio, along with the NYM EX futures for both these commodities over the next three years.5 As illustrated, the price advantage for natural gas is expected to remain in place through the end of 2014 — and perhaps longer — based on the NYMEX prices during the first two weeks of August 2012.
Appalachian Coal and Gas Prices
The outlook for coal generation in the Mid-West and Mid-Atlantic is impacted by the fact that they are among the oldest and least-efficient plants in the country. The average heat rate, defined as the heat input required to generate one kWh of electricity, is greater than 11,000 Btu for coal-fired plants in this area. A new, efficient combined cycle gas power plant only requires around 7,000 Btu to generate one kWh of electricity. Adjusting for these heat rate differentials contributes to the price advantage in favor of natural gas generation, and is included in the price charts. Of course, there will be a wide variation in the efficiencies and delivered fuel costs for both coal and natural gas power plants, so not all coal generation will be displaced at the same time. Additionally, the vast majority of coal plants purchase coal under longterm contracts, and thus not all plants are immediately exposed to the full impact of price fluctuations.
While coal generally has maintained its price advantage relative to natural gas in the western U.S., the overall coalto- gas switching phenomenon has not been affected due to regional factors.The most prolific coal basin in the U.S., producing about 40 percent of U.S. coal, is Wyoming's Powder River Basin.The historical relationship between Powder River Basin coal and Colorado Interstate Gas (CIG) is shown in Figure 4. Natural gas has been less expensive than coal in the western states by a smaller margin and for a shorter time than in the eastern U.S.; and it currently is not cheaper than Powder River coal. Despite the high volume and low price of Powder River Basin coal, it has not impeded significant coal-to-gas switching in the U.S. for two main reasons: First, because only 10 percent of the coal-fired power plant fleet is located in the western U. S., near the Powder River Basin.second, because the Powder River Basin coal is sub-bituminous coal, which is "less desirable" than Appalachian "metallurgical" coal due to its lower heat content. Thus, the eastern U.S. is effectively the key competitive battleground area for coal and gas competition and, more recently, for switching.
Western Coal and Gas Prices
The low cost of natural gas in the eastern U.S. relative to the cost of coal is the main reason U.S. coal-fired generation dropped an average of 28.5 terawatt hours (TWh) per month,6 or 20 percent d uring the first half of 2012, compared to the first half of 2011. At the same time, natural gas generation increased by 25 Twh/month7 or 34 percent. The changing mix for electric generation between coal and natural gas over the last three years is illustrated in Figure 5. The displacement of coal-fired generation with gas-fired generation has amounted to an average of about 6 Bcfd, with the majority of the switching occurring in the RFC and SERC Reliability Corporation8 NERC regions..
Average U.S. Electricity Generation 2010-2012
It is important to note that many of the coal plants currently reducing output due to low natural gas prices are the same coal plants scheduled for retirement. So, in one sense, coal-togas "switching" will continue on a more permanent level, due to replacement of the retiring coal-fired capacity, even Though short-term switching based solely on fuel prices should decrease. Following this pattern, as natural gas prices trend moderately upwards towards what Navigant believes is the fuel's natural long-term sustainable price range of $4 to $6 per MMBtu, and depending upon fluctuating coal prices, the recent discount of natural gas prices to coal prices may disappear. Only time will tell. What we do know is that the 48 GW of coal plant retirements expected between 2011 and 2017, are apt to put downward pressure on coal prices. Nevertheless, the recent proliferation of shale gas production should ensure that coal and natural gas prices remain in close proximity to one another.
As can be seen in Figure 6, the Marcellus shale deposit lies underthe heart of U.S. coal country, and it will drastically change natural gas flow patterns and prices in a region that has traditionally imported the majority of its natural gas. It has been estimated that the Marcellus shale has total recoverable reserves exceeding400 Tcf, and estimates continue to rise as the development of the shale continues. Some of today's estimates are close to double the estimate in Navigant's 2008 North American Natural Gas Assessment completed for the American Clean Skies Foundation, where Navigant first identified the rapidly expanding development of natural gas from shale gas resources.9 Furthermore, the Marcellus overlaps a portion of the Utica shale, which is still in the early stages of exploration and could contain even more natural gas than Marcellus. So, the ability of natural gas to compete head-on with coal for the long term appears certain.
Displacement of Coal Capacity
While fuel cost is the main driver of the first type of coal-to-gas switching, it is only one part of the reason why the retirement of old, coal-fired generation units is occurring. The Environmental Protection Agency (EPA) has issued several rules that will significantly impact the operation of the coal-fired power plant fleet, which currently constitutes more than 30 percent of the electrical generation capacity in the U.S. The most significant of these rules are the Mercury and Air Toxics Standards (MATS) and the Cross State Air Pollution Rule (CSAPR). MATS, formerly known as the Maximum Achievable Control Technology, set emission limits on mercury and other toxic pollutants from power plants. As the rule does not allow for trading of credits between plants, owners cannot over comply at one site and leave another without controls. Coal plants have until April 2015 to comply with MATS, with individual states able to grant an additional year if needed. The timeline can be extended to a fifth year in exceptional circumstances where a unit is required for reliability.
CSAPR was designed to meet the requirements of the Clean Air Act and the Regional Haze Rule. The Clean Air Act requires EPA to control Nox and S02, as well as particulate matter. The Regional Haze Rule was designed to limit emissions that degrade visibility in national parks and wilderness areas. Under CSAPR, a pollution limit or budget was set for each state that contributed significantly to a Downwind state's pollution problems. The agency also adopted a cap-andtrade approach that would allow intrastate and limited interstate trading of emissions allowances, but also set hard limits on how much each state could emit.
On Aug. 21, 2012, the U.S. Court of Appeals for the District of Columbia Circuit vacated CSAPR, finding that EPA went beyond the scope of its authority. In the meantime, the Clean Air Interstate Rule (CAIR) remains in effect until a successor program can be developed. The fact that the court left CAIR in place while the EPA comes up with a replacement for the rejected CSAPR standards "is a good indication that some standards will continuously be in effect." Retirements are expected to occur over the next few years — to meet MATS — primarily in the RFC and SERC NERC regions. Actual and announced retirements by year are shown in Figure 7. The disparity of retirements across the country is shown in Navigant's estimate of total retirements, including both actual and announced retirements, and estimated unannounced retirements, illustrated in Figure 8.
Projected Coal Retirements From 20II by NERC Region (GW)
Using our Coal Retirement and Retrofit Model, Navigant projects a total of 48 GW of coal-fired power plant retirements from 2011 through 2017.This figure contains about 16 GW of retirements beyond those that have Been announced, almost 2 GW of announced retirements in the Pacific Northwest, and I GW of announced retirements in Texas that are scheduled to occur beyond the next five years. The main drivers of retirements are the relative prices of coal and gas as power generation fuels, and the potential capital costs to retrofit power plants to meet plant-specific environmental requirements such as those of MATS. As indicated in Table I, most of the units that have announced retirement Are older (great than 50 years in service), smaller (by 46 percent) and have lower utilization (42 to 63 percent) than the nation's coal fleet as a whole. In today's new environment, with natural gas competitive with coal as a power generation fuel, the economics don't support pouring retrofit money into such plants when they can be replaced with more efficient, natural gas-fired generation.
Retiring Coal Generation Comparison
Even though CSAPR would not have impacted the western states, the Regional Haze Rule will affect them. There are currently approximately 4 GW of announced retirements in the West, but this number could grow based on the recently released implementation plans to meet the Regional Haze Rule. Recently, the EPA reviewed State Implementation Plans or issued Federal implementation plans for coal plants in Arizona, Nevada, Utah, New Mexico, Colorado, Wyoming and Montana. The plans could impact an additional I Gwof operating capacity that is not currently announced for retirement. Retirements of 5 GW throughout the West would account for less than 3 percent10 of total, regionwide generation capacity Or up to 0.5 Bcfd of natural gas demand. The impact of coal retirements on the West, in contrast to other areas of the country, will likely be minimal.
In most instances, power plant owners consider their alternatives before announcing final retirement plans. The lack of a state-level rule (like CSAPR) in the West to address the Regional Haze Rule has resulted in specific equipment being proscribed on a plant-by-plant level. It has been Speculated that the repeal of CSAPR in the East may drive a similar, plantby- plant approach in those states, with all reductions to be achieved at a plant level and without emissions trading to mitigate retirements, unlike CSAPR. This could cause far more retirements than currently estimated by Navigant under the CSAPR Rule.
As a result of the realignment of coal and natural gas fuel prices, and the costs of emissions allowances or mitigation, there recently has been a significant amount of substituting natural gas-fired for coal-fired electric generation. Short-term economic switching likely has amounted to more than 6 Bcfd of incremental natural gas consumption this year versus last. While such fuel substitution would likely diminish as natural gas prices return to a more equilibrium-type level of $4 to $6 per MMBtu, economics still indicate switching from coal to gas in the longer-term, but in the context of the replacement of coal-fired generation capacity by natural gasfired generation capacity. Due to the competitive natural gas prices that are expected to result from the new environment of shale gas abundance, along with the capital expenditures for upgrading coal plants that are likely to be necessary as a result of environmental policies, significant amounts of existing coalfired generation capacity is expected to retire over the next five years, creating a long-term bump in natural gas consumption estimated at about 4 Bcfd
This sizable volume of new natural gas demand will help support the country's expanding dry natural gas production base that has, over the past few years, grown by about this same volume annually and which, at this point, is about 65 Bcfd. Coalto- gas switching will continue to be an important market phenomenon over the medium term, as coalfired power plant retirements wind down. Meanwhile, new markets for natural gas, such as LNG exports and possibly industrial demand, will help sustain the ongoing development of the country's abundant, clean and inexpensive shale gas assets.
Gordon Pickering
director, Navigant Consulting - Energy, is the co-leader of Navigant's North American natural gas consulting practice. He has more than 30 years of energy industry experience in the natural gas and power industries in both the United States and Canada. For the last 10 years, he has been employed by Navigant in Sacramento, Calif. Most recently, he has directed Navigant's industry leading efforts assisting LNG export projects filing for non- FTA approval before the DOE. Mr. Pickering also has been very involved with gas shale developments in North America and its impacts on the market, and is a frequent speaker on gas topics across North America. Gordon can be reached at gpickering@navigant.com
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