September 1, 2017 Read More →

IEEFA Update: 8 Things in the DOE Report That the U.S. Coal Industry Wishes Weren’t There

Markets Have Changed, Technology Has Evolved, Competition Is Stiff, the Grid Evolves …

When the coal industry and its allies persuaded Department of Energy Secretary Rick Perry to commission a study on whether a long wave of coal-fired power plant retirements hurt the reliability of America’s electricity grid, the answer they were hoping for that the U.S. needs more coal plants.  

But the conclusion that came back last week was something else. The DOE study (Staff Report to the Secretary on Electricity Markets and Reliability”),  does not  justify public policies aimed at reviving the coal industry.  

While the coal industry is spinning the report as just what the doctor ordered, that’s not what it is.

The report concludes that the grid is performing just fine, even after more than 500 coal-fired plants have been taken off-line since 2002 and even though news of another shutdown occurs day in and day out. To put a numerical prism on it, the 531 coal-fired electricity-generation plants that were closed from 2002 through 2016 represented 59,000 megawatts of generation capacity, or 11 percent of available generating capacity. Grid stability did not suffer.

Among the report’s most important findings:

  1. Electricity powered by natural gas and wind and solar is cheaper than coal. Here’s one of the many ways the report makes that point:
    When natural gas prices were high, this situation yielded large profits to the then lower-cost coal and nuclear power producers. However, as gas prices and therefore wholesale and bilateral contract power prices have declined, the situation has reversed, and many coal and nuclear plants have been losing money.”
  2. Demand for electricity in the U.S. has slowed due to positive market responses to energy efficiency standards and large-scale reductions in the energy intensity of economic growth.  When electricity demand is flat, there is less room for high-cost power generation, a trend that has not been kind to coal.
  3. Wind and solar energy have grown, cutting into coal’s market share. The lower operating costs of these newer sources place them ahead of coal-fired power on the dispatch curve. This cuts into the revenue of utility companies that run traditional coal plants. Coal plants now sell less electricity, and at lower prices. Utilities have a financial incentive to close these plants.
  4. The system is resilient, all the coal plant shutdowns notwithstanding, and every region of the country has reserve margins above resource adequacy targets.
    “Overall at the end of 2016, the system had more dispatchable capacity capable of operating at high utilization rates than it did in 2002.”
    Every electricity-generation source—coal, gas, solar, hydro, wind, nuclear—has drawbacks and vulnerabilities, yet there is nothing in the report that makes a case for coal being a better risk than anything else.
  5. While environmental regulations may be a cost factor for some companies, they are not the main reasons plants are closing. Rather, coal-fired plants have been rendered uneconomic due to the cumulative effect—in this order—of natural gas price decreases, low demand, renewable energy and then environmental regulation.
  6. A diverse energy grid is a powerful hedge against price volatility and outages, and the grid is now stronger in these respects than it has been in 40 years. Energy diversity was high during the late 1970s, when coal had a smaller market share.  As that share increased from the 1980s to the early 2000s, ultimately reaching about 50 percent, diversity dropped—happening as a function of public policy “helped with funding from low-cost federal land and mineral leases.”
  7. The drop in the wholesale price of electricity since 2002 is due to “lower demand, lower natural gas prices and growth in VRE [variable renewable energy].”  The report indirectly attributes low retail prices to the role of renewables in the market, noting that “wind, solar, PV, hydropower and geothermal generation offer near zero-marginal-cost electricity ” and that the result has been price stability.
  8. The most damaging point, that hundreds of coal plant closings occurring alongside a boom in renewables has not hurt the grid, is also the central thesis of the report:
    “Grid operators have kept up with these factors (the challenge of renewable integration) by developing new infrastructure technology and analysis capabilities, such as more sophisticated wind and solar forecasting methods.”

What else the report says:

The  expansion of renewable energy comes with costs and risks will require more investment to support integration efforts. This transition will have potential pluses and minuses for wholesale prices, depending on how it is managed.

While the phase-out of tax credits for wind and solar will cause the cost of production for renewables to rise, innovation in wind and solar capital costs and productivity are likely to offset this effect.

The only recommendation in the report that explicitly supports coal relates to the removal of regulations consistent with President Trump’s Energy Dominance Executive Order and the call to fund research in favor of development aimed at increasing coal’s efficiency, initiatives that have yet to produce gains that can compete with those being achieved by wind, solar and natural gas production.

The report makes clear that the regulatory relief for coal already being undertaken by the Trump administration is unlikely to reverse coal’s declining market position.

THE REPORT HELPS EXPLAIN ALSO WHY PERRY’S ENERGY DEPARTMENT HAS BEEN QUIET on West Virginia Gov. Jim Justice’s pitch for a taxpayer-funded subsidy for eastern coal producers, as well as why the administration has rejected a request by Murray Energy and Peabody Energy to use emergency provisions of federal law to impose a two-year moratorium on coal-plant closings.

In the context of the federal law, an “emergency” is when the lights can’t be kept on. The emergency articulated by Murray, that his company might go bankrupt, is his emergency, not a public emergency.

This report couldn’t and didn’t find what the coal industry was hoping for—that there is an objective rationale for coal industry expansion.  Efforts by the industry to support untenable solutions to its business problems based on misleading arguments will be rejected by the operational imperatives of the grid.

One way to state the core problem faced by U.S. coal producers is that the grid is managed by professionals who must keep prices affordable and maintain systems that are reliable and resilient. Coal is losing out due to technological and scientific changes, broad changes in the economy and better business models by the competition.

With Donald Trump in the White House , the coal industry thinks it has the keys to the kingdom, but it hasn’t figured out yet how to find the door to a viable future.  

Tom Sanzillo is IEEFA’s director of finance.


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IEEFA Update: Decoding Glenn Kellow’s Peabody Recovery Strategy (Subsidies, Handouts, Giveaways)

IEEFA Update: Who Bob Murray Is, and What He Wants