Publications

- April 1, 2017; Vol. 4, Number 4

Energy Milestone: Natural gas has surpassed once-dominant coal as fuel source for electric power

by Energy Milestone: Natural gas has surpassed once-dominant coal as fuel source for electric power

Despite President Donald Trump’s pledge to revive the struggling U.S. coal industry, coal plants continue to close. And there’s really nothing he can or should do about it.

Even as legacies of the Obama administration’s environmental policy — most notably the Clean Power Plan and the Stream Protection Rule, both thorns in the side of the coal industry — are rolled back, coal’s future still looks bleak. Although coal accounted for 30 percent of U.S. electricity production in 2016 and is the preferred fuel of some heavy industries, the number of coal plants is shrinking and coal’s contribution to generating electric power has been in steady decline for years. Utilities are shuttering older coal plants, and there are no plans to build new units.

To grasp just how much has changed, consider this historic energy milestone: Just a decade ago, coal provided roughly 50 percent of the fuel used to generate the nation’s electric power while natural gas accounted for less than 20 percent — and those shares had been pretty stable since the early 1970s (see chart). But thanks to the shale revolution and a bonanza of cheap natural gas, the share of electricity generated from natural gas rose above 20 percent in 2007 and has climbed steadily since then. It reached an all-time high of nearly 34 percent last year and surpassed coal’s share (30.4 percent) for the first time ever.

That historic reversal in fuel sources for electric power will continue indefinitely and suggests that coal’s demise has more to do with an upheaval in energy markets than the consequences of any government energy policy. Champions of renewable energy like to boast that coal’s collapse is the result of dramatic reductions in the cost of wind turbines and solar arrays, but the real cause lays elsewhere — natural gas. Coal is at the mercy of the shale revolution and the nation’s abundant, affordable supply of natural gas.

Ironically, those most outspoken about the threat of climate change never thought a switch to natural gas would be such an environmental blessing. In fact, even as cheap natural gas is powering our economy, carbon emissions from electricity production are at their lowest level since the early 1990s. Simply put, the carbon intensity of the electricity sector has dropped dramatically.

As U.S. natural gas output surged over the past decade, turning the nation into the world’s largest producer, utilities recognized this vast supply of natural gas for exactly what it is — the clean energy tool they can use to reduce emissions while holding down, or even reducing, electricity rates.

Not too long ago, natural gas generation was just the nation’s third-largest source of power behind nuclear energy and coal. But today it generates the largest share of our electricity and its hold on the marketplace is set to tighten. The U.S. Energy Information Administration reports that some 36.6 gigawatts of new natural gas capacity are expected to come online by 2018. That’s the largest addition to gas capacity in more than a decade.

What’s remarkable is that, despite growing demand for natural gas — from the power sector, from manufacturers and now from exports — natural gas prices are falling. Natural gas delivered to generators averaged $5 per million British thermal units (Btu) in 2014, fell to $3.23 per million Btu in 2015 and was only $2.78 per million Btu for most of 2016. Thanks to a mild winter, the Energy Information Association reported recently that natural gas prices in some markets are currently approaching $2 per million Btu.

We are just beginning to understand the enormity of the natural gas resource the shale industry has unlocked — and its global geopolitical impact. What we do know is that increases in U.S. oil and gas production have helped counteract efforts by OPEC and Russia to raise global energy prices. While heavy-handed government direction has been used in Europe to tackle emissions, the U.S. market approach — which has leaned on competition, not mandates — has proven strikingly more effective and far less costly.

Whether or not environmental leaders recognize it, the coal industry’s continued challenges speak volumes about the trajectory of U.S. carbon emissions under the Trump administration’s watch. Cheap, abundant and clean natural gas is here to stay, and with it the continued shift toward a more modern and efficient U.S. generating fleet. It’s time to give America’s game-changing frackers and “petropreneurs” their long overdue recognition.

Mark Perry (@Mark_J_Perry) is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan, Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem, from which this column was republished. To read the original version of this article, go to this link http://bit.ly/2mt0Dl3

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