While presidential candidate Donald Trump continues toblame the U.S. EPAfor the fall of the coal industry, the real coal killer is cheap natural gasfrom U.S. shales, according to a new study by Case Western University inCleveland.
"EPA rules have had little to do with coal'sdecline," the study said. "Shale-gas competition, however, hasdecimated coal."
The current clean-air rules have been in place sincePresident George H.W. Bush's administration in 1990, supplanted only recentlyby the Mercury and Air Toxics Rule, the study said, which went into effect onJune 13 after clearing the court system. The proposed Clean Power Plan is stillin the regulatory process and will face years of court challenges, authorsWalter Culver and Mingguo Hong said in the study published in the Septemberedition of The Electricity Journal.
"EPA air-quality rules, largely unchanged since 1990,predate by 19 years and seem detached from the decline of coal," the studysaid.
Regulations that have hurt coal are not federal rules, butefforts by the states, primarily the adoption of renewable fuel standards byindividual states, the study noted, as well as the increasing efficiency andoperational superiority of combined-cycle, gas turbine power plants, theauthors noted.
What has really undercut coal is the low price of naturalgas, directly traceable to the shale revolution. Excluding two price spikesfrom hurricanes in 2005 and the Great Recession in 2009, average Henry Hubprices from 2008 to 2015 are lower than the period 2000 to 2007 and show muchless volatility, the study said.
"In 88% of the 49 months from January 2012 throughJanuary 2016, gas was $4.25/MMBtu — bettering the breakeven for all Appalachiancoal. For 57% of the 49 months, gas was $3.50/MMBtu — bettering Appalachian,Illinois, and Rockies coal," the study noted. "Even [Powder RiverBasin] coal, with its low mine-mouth costs, compared poorly with gas for thegreat population centers east of the Mississippi. The PRB is 2000 miles fromNew York and 2200 from Florida or Massachusetts. With rail transport at $0.03per ton-mile. PRB coal was as disadvantaged in the East as Appalachian coal."
The authors noted that using prices at the Henry Hubbenchmark does not account for the dozens of pricing hubs throughout the US,all with their own regional dynamics: glutted in Appalachia, constrained inFlorida and New England.
"This caveat is receding in importance, however, (a) asnew pipelines come on line, (b) as existing pipelines reverse flows, and (c) asgas storage sites expand — all bringing the U.S. an increased diversity ofsupply and freer access to the Appalachian gas boom," the study said.
Henry Hub prices also don't account for variances indelivered costs to power plants and individual dispatch rules unique to eachregional transmission organization, the authors said. The study estimated thatadded costs from these factors ranged from zero for power plants near pricinghubs to 35 cents/MMBtu for California's power plant fleet and 50 cents/MMBtufor remotely located electricity generators.
Long-term investment in natural gas over coal-fired plants isreasonable given the size of the shale resource, the study said, noting thatdrilling costs are still going down as productivity per rig goes up, while atthe same time, the amount of proved reserves is outpacing the amount ofproduction "exponentially."
With new demand from the power sector expected to berelatively flat, future demand from both pipeline exports to Mexico and for LNGexports is expected to grow at a pace that doesn't ruinously jack-up naturalgas prices, the study said, using projections from the U.S. Energy InformationAdministration.
"With some confidence, therefore, we can project thatpipeline plus LNG exports should not drive gas prices particularly high,"the authors said.
The low prices driving shale gas production down as operatorsgo broke is overrated, the authors said, predicting that in a steady-stateenvironment, gas prices should be $3.50/MMBtu or less, still undercutting coal,with drillers still earning a 10% profit. Drillers driven out of business bylow prices simply create more inexpensive inventory for the survivors to buyand drill, the study said, keeping prices capped below coal.
"All those gas assets written down, or inexpensivelybought by the survivors from the failed and failing drillers, will makedrilling even less expensive, and the remarkable extraction productivity isstill there ready to be applied," the study said. "It seems almostcertain that they will be put to work to set gas prices on the kind of soundeconomic footing that comes with a more mature industry. To us it appears thatthe steady state is around $3.50/MMBtu or less — still very attractive comparedto coal."
The final nail in coal's coffin isn't price, the studycontends, but the technical superiority of natural gas and natural gas powerplants over coal-fired generators. Gas plants have improved their efficiency by34% in the past 12 years, while the heat rate of coal plants has remainedstatic over the same period of time.
"We have presented the evidence-backed case for newpower plants not to be coal-fired, for reasons that have little to do with U.S.EPA's policies now in force. Since 2009, natural gas was, is now, and seemsdestined to be greatly superior to coal in price and technicalperformance," the authors concluded.
Culver is the former chairman and a founding board member ofCase Western's Great Lakes Energy Institute, and a retired executive frominformation technology firms. Hong is an associate professor in the ElectricalEngineering and Computer Science department at Case Western.