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Power play

Cheap natural gas is bringing coal’s long reign as the fuel of choice in US generation to an end

The golden age of gas hasn’t turned out quite as American producers hoped. Demand hasn’t kept up with surging supply. Prices have sunk to historical lows. Stalwart producers like Chesapeake Energy are struggling to survive. Still, the business is on the cusp of a landmark moment. This year, gas should unseat king coal at the top of America’s power mix.

Coal has dominated the power mix for decades. It might be dirty, but it’s also dirt-cheap and it fuelled America’s economic rise. As recently as a decade ago, coal-fired power accounted 50% of generated electricity. Then came an onslaught of cheap natural gas, a raft of new environmental rules and the rise of renewables.

The ensuing transformation of the power mix has come faster than anyone thought possible. The Energy Information Administration (EIA) reckons gas-fired electricity will edge out coal in the power mix making up 33% of generation compared with coal’s 32%, followed by nuclear at 19%, wind and solar at 8%, and hydro at 6%.

While coal’s decline has been on the cards for some time, it is cheap natural gas that has accelerated the fossilised carbon’s dethroning. The Henry Hub benchmark averaged just $2.00 per million British thermal units from November to March, a price that makes it as cheap as coal. Moreover, the arrival of shale gas development has eliminated much of the extreme price volatility that long plagued the market and made gas a risker fuel for utilities. Over the past five years, gas prices have only averaged more than $5/m Btu in one mont. That has led many electricity suppliers to switch to gas for baseload generation. “Right now the winner-take-all fuel is gas,” says David Crane, the former chief executive at NRG Energy and an outspoken advocate for renewables.

Powering ahead

Can it last? It is hard to see gas remaining anything except dirt cheap in the coming months. Production is finally starting to flatten out in the face of low prices. But a warm El Niño winter left natural gas storage facilities brimming at near record levels for this time of year. Inventories at the start of April sat at 2.468 trillion cubic feet, 50% higher than the five-year average. Even if production starts to decline – a big if given producers’ ability to lift output in the face of past low prices – it will take time to work through the overhang. Weather could push prices higher temporarily, but a sustained price recovery is unlikely until 2017.

That is bad news for the beleaguered coal business, which is being pummeled by low gas prices and new environmental rules. Last year alone, the coal fleet shrank by 4.6% as a host of older plants – mostly built in the 1950s and 1960s – accounting for nearly 14 gigawatts of generating capacity were shut down. Many of those units were pushed into early retirement by the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standards (Mats) regulations.

And coal’s slide is just beginning. Another 6.5 GW of coal capacity is to close this year, and a total of nearly 30 GW by the end of 2020, according to the EIA. That will shrink America’s coal capacity by around 10% from 2015 to 2020, a retrenchment that will likely never be recovered as carbon-fighting measures bed in.

Even those coal plants still running have been operating at much lower capacity than just a few years ago. Last year was the first in which gas power plants ran at a higher capacity than coal generators – 56% to 54% – a sign that gas has been the fuel of choice for electric utilities. A decade ago, coal plants typically operated at around 66% of their capacity while gas plants typically ran at 30%.

Coal’s decline opens the way to a fight for market share between gas and renewables. Gas producers clearly hold the edge for the foreseeable future. They are reaping the benefits of nearly a decade between the late 1990s and late 2000s when nearly all new generating capacity added in the US was gas-fired.

But today, it is wind and solar generating capacity that is leading the way. Wind and solar developers accounted for around 66% of new capacity in 2015, and the renewable duo are expected to make up around 60% of the 26 gigawatts in new generating capacity to be added in 2016. In the same way gas is benefiting today from the rapid buildup of generation capacity in the 2000s, renewables will benefit from the wind and solar building boom underway for years to come.

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