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Brattle: DOE proposal could boost coal, but future price of gas casts shadow

A new analysis from the Brattle Group suggests the U.S. Department of Energy's recently proposed rulemaking to support baseload generation resources could be the savior the coal and nuclear industry are looking for, but only in the increasingly less-likely event that natural gas prices take a turn upwards.

The DOE in September issued a notice of proposed rulemaking directing the Federal Energy Regulatory Commission to adopt a new rule requiring operators of organized markets to "ensure that certain reliability and resiliency attributes of electric generation resources are fully valued." The proposal has proven controversial among industry stakeholders, with some calling the move a "subsidy," and others supporting a review of the issue but not, perhaps, the drastic measures proposed by the agency.

Marc Chupka, a principal economist with Brattle, presented the findings of a new analysis at the Energy Bar Association's Mid-Year Energy Forum on Oct. 17. Citing the Trump administration's efforts to revive the coal industry, Chupka modeled the power generation sector and considered various scenarios with and without the Clean Power Plan, which the administration recently proposed to repeal. In the two scenarios without the Clean Power Plan, the pro-coal scenario modeled a high rate of industrial electricity demand growth and reduced costs of delivered coal, while the pro-fossil scenario added a greater expansion in natural gas supply.

The analysis shows that policies can "modestly stimulate" coal if the Clean Power Plan is removed from the picture and mining costs are brought down. Chupka found that the Trump administration's current policies towards coal could boost coal production by about 50 million tons per year in 2020 and by 150 million tons in 2030, compared to the scenario with a future in which power plants must cut carbon.

But if policies continue to support natural gas production, Chupka said "you will end up crushing coal in this country."

"There is very little that generators can do in the face of $3 gas, in terms of coal," Chupka said.

Coal was not eliminated entirely in the pro-fossil scenario, but production dropped by about 30%, or by about 220 million tons in 2020 and by 210 million tons in 2030 compared to the scenario with the Clean Power Plan. Also under the pro-fossil scenario, Chupka saw a corresponding drop in employment of between 13,000 and 16,000 jobs, particularly in the East because of mining practices.

Low gas prices seem to be the most likely future, which will weigh heavily on the success of the DOE's proposed rulemaking, Chupka said. He suspects the proposal, depending on how, and even if, FERC adopts it, could offer billion of dollars in support for coal-fired generators. But the exact amount would be highly reliant on the future price of natural gas.

"It looks more like the lower natural gas future is materializing, compared to some of the higher natural gas price futures, which will raise the cost of implementing this program," Chupka said.

The proposal could be rolled out in many different ways, each with its own impact on coal and nuclear generation. For instance, Chupka said the proposal could place merchant coal and nuclear plants into the cost of service ratemaking paradigm, which could include embedded costs, an idea he called "an interesting departure" that would likely keep nuclear plants running more so than coal. Conversely, coal could be supported through energy payments, but Chupka is not sure that would "square" with how energy markets are operated.