Coal’s future is increasingly dim.
The Institute for Energy Economics and Financial Analysis (IEEFA) – a nonprofit think-tank – recently published an analysis showing that the U.S. is on track to close half of its coal-fired generation capacity by 2026, just 15 years after it reached its peak in 2011. And by the end of 2030, over 80 gigawatts of remaining U.S. coal-fired capacity are set to close, roughly 40% of current U.S. coal-fired capacity.
This is a stunning turnaround. From 1950 to the end of the 20th century, coal-fired generation supplied over one-half of total electricity net generation in the U.S. This dominance continued into the early part of this century, when from 2000-2006, coal accounted for over half of total generation.
Then things changed. Lower-priced natural gas, made possible by the emerging shale technologies, coupled with more efficient natural gas turbines and combined cycles generation, began cutting inexorably into coal’s share. More recently, coal’s decline has been further exacerbated by growth in solar and wind, now comprising 14% of total U.S. generation.
Coal and natural gas generation, being dispatchable and flexible, have long traded off against each other. The relative shares of coal vs. gas-fired generation tend to be tied to the relative prices of the fuels, and are best expressed here on a $/MWh basis in order to account for their substantially different heat rates. As seen on the chart below, when natural gas prices are high relative to coal, coal’s share of generation increases, and vice versa.
But we also see in the graph above that while the generation shares have generally been sensitive to relative coal and natural gas prices over time, the coal shares have been declining over time. As more coal capacity retires, there is simply less coal capacity available to absorb load shifts from natural gas units when natural gas prices are high. Because of this, a given price differential between coal and gas now has less effect of generation shifts than the same price differential would have a few years ago.
An implication of the IEEFA report is that relative fuel process will play an increasingly smaller role in power dispatching. With less and less ability to switch from natural gas to coal, natural gas consumption in the electric power sector will be less price elastic.