It’s a key expected transition in how we get our electricity — and it may be happening even faster than expected.
For the second time this year, according to the U.S. Energy Information Administration, natural gas has temporarily surpassed coal as the number one source of U.S. electricity. This happened in the month of April for the first time ever, and then also happened for July, when natural gas provided 35 percent of U.S. electricity generation and coal provided 34.9 percent, says EIA.
This certainly doesn’t mean gas will now be ahead every month going forward — natural gas prices have been quite low lately and may not stay that way — but it nevertheless does appear to be a milestone and a sign of the times.
“Is it the moment? I think there are many moments,” says Michael Liebreich, advisory board chairman and founder of Bloomberg New Energy Finance, of the developments. “These are huge industries, very capital intensive, they don’t go away overnight, but it absolutely is the long term trend.”
Certainly, the change since a little over a decade ago has been gigantic. In 2003, according to a new paper by MIT’s Christopher Knittel and two colleagues published by the National Bureau of Economic Research, coal supplied 51 percent of U.S. electricity and natural gas supplied only 17 percent. But that had changed to 37 percent and 30 percent, respectively, by 2012 – and in 2015, forecasts the EIA, it will be 36 percent to 31 percent overall.
The causes are myriad but most centrally include growing numbers of coal plant retirements and plunging prices for natural gas, which in turn have been triggered by the unconventional gas revolution, in which a combination of fracking and horizontal drilling has unleashed dramatic new reserves of natural gas from deep shale layers. Natural gas prices today are well under $ 4 per thousand cubic feet, whereas they were as high as $ 12.41 in 2008.
Indeed, gas prices are particularly low this year due to a supply glut that can be traced all the way back to the “polar vortex” of early 2014, says Erica Bowman, chief economist for America’s Natural Gas Alliance, a trade group of U.S. companies. So much gas was used to keep people warm that storage levels declined to quite low levels — and producers, accordingly, ramped up supply, driving down prices.
“It was just a massive amount of gas that came on, and I think the market realized, ‘whoa, not only have we filled storage, but now we also have all this production, and we need to figure out a way to get through it,’” says Bowman. “And really, the power sector is, let’s say, your swing industry, it has the ability to ramp up gas and ramp down other fuel sources, and that’s why you’re seeing more generation in 2015, and prices lower.”
And even as gas has gained ground because of fracking technology and a current supply glut, coal has been suffering from a steady string of setbacks. Most recently, under the newly finalized Clean Power Plan, it looks like the clear target, having much higher carbon emissions than natural gas when burned. And that’s to say nothing of other emissions, like sulfur dioxide and mercury — compliance with mercury rules, in particular, is driving a number of coal plant retirements this year.
For such reasons, coal has suffered from a kind of “writing on the wall” effect as climate efforts become increasingly serious, says Bloomberg New Energy Finance’s Liebreich — even as it has lost ground not only to natural gas but also to renewables, which are contributing more and more of the U.S. electricity generation mix each year.
Indeed, when you look at the types of electricity generating facilities that are being built in the U.S. now, you see the same trend. In March, the Energy Information Administration projected that 91 percent of new generating capacity installed in 2015 will be in wind, natural gas and solar. By contrast, the vast majority of generating capacity expected to be retired in 2015 was in coal-fired plants.
And future trends in the electricity space may only add to the burden on coal, says BNEF’s Liebreich. “We have storage costs going down, ease of demand management going up, electric vehicles coming into the mix, all of which threatens coal first,” he says. “Coal is definitely first in the firing line.”
Recent research suggests that natural gas might have gained even more ground on coal in our overall electricity mix than it already has — if not for an oddity in how we regulate electricity in the U.S.
The new study, published by the National Bureau of Economic Research, finds that as natural gas prices have plunged over the past eight years or so, there have been different amounts of “switching” from coal to gas in different kinds of electricity markets. Traditional, regulated markets have seen a great deal of switching, but deregulated or restructured markets, featuring more consumer choice of power providers, have seen considerably less.
The reason seems to be that incumbent, highly regulated utilities have more stable market positions and they can therefore innovate more. By contrast, “in restructured or deregulated markets, it’s a riskier market, so risk can often lead to lower investment than in a less risky environment,” says MIT’s Christopher Knittel, who led the research, published with Konstantinos Metaxoglou of Carleton University and Andre Trindade of the Fundacao Getulio Vargas in Brazil.
Low natural gas prices have also had another recent effect in a different part of the electricity market. The large utility company Entergy just announced plans to close down Pilgrim Nuclear Power Station in Massachusetts, citing, as one of the causes of the decision, the gas boom.
“Low current and forecast wholesale energy prices — brought about by record low natural gas prices, driven by shale gas production — significantly impacted Pilgrim’s revenues,” the statement said.
And while long term projections vary considerably, many envision a future out to 2030 in which natural gas becomes the top source of electricity in the U.S. by a significant margin. The U.S. EPA, in its Clean Power Plan, forecasts that natural gas will provide 33 percent in that year and coal just 27 percent. But Bloomberg New Energy Finance is considerably more bullish, projecting 35 percent natural gas, 25 percent coal, and 14 percent renewables in a “business as usual” outlook without the Clean Power Plan’s implementation by the same year. Clearly, there’s a gap here, albeit with an agreement on the big picture.
In any event, the increasing trend toward gas over coal — and renewables over coal — has huge carbon consequences: Natural gas burns cleaner, and renewables don’t emit at all. However, as the gas revolution continues, environmentalists have more and more targeted so-called “fugitive” emissions of methane, a potent if short-lived greenhouse gas, during production — arguing that at minimum, it complicates claims about gas’s environmental advantage.
Precisely how much fugitive emissions matter depends on how large they are, but there’s little doubt that the issue becomes more and more relevant as gas moves into the foreground. “As we ramp up fracking and rely more on natural gas, we need to be more and more worried about what those emissions are and how we can economically reduce them,” says MIT’s Knittel.
But that focus, itself, may be a sign of natural gas’s market ascendance.