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The great transformation of US power

The US power sector faces unprecedented change with the rise of renewables and gas

It's been a bad year for coal. Production is expected to fall nearly 20% in 2016-the biggest drop in a single year since the government started keeping count in 1949. Demand is on pace to shrink by 10% as cheap natural gas supplants coal as the dominant fuel for power providers. Industry stalwarts Peabody Energy, Patriot Coal, Alpha Natural Resources and Arch Resources have been pushed into bankruptcy. Coal's terrible year means 2016 will likely be remembered as a turning point in the US power sector.

Coal's reign is giving way to a combination of natural gas and increasingly competitive wind and solar. In 2007, the US burned coal to generate half of its electricity, but that dominance has eroded. April 2015 was the first month natural gas surpassed the black stuff in the power mix and 2016 will be the first whole year it does so-with gas expected at around 34.5% compared to coal's 30%, a remarkable 20% decline in less than a decade.

Coal executives like to blame a "war on coal". But as much as some of the industry's opponents would like the credit for coal's decline, the problems have been far more structural and market driven. Chief among coal's problems in recent years has been the onslaught of shale gas production that has pushed Henry Hub prices to record lows.

Looking back further to the 2000s structural signs of natural gas's rise-at the expense of coal-could be seen. Market deregulation in the late 1990s opened the door to new players. And thanks to technical advances, tighter environmental rules and the fuel's intrinsic advantages, those new players found that gas-fired power generation was far cheaper and more flexible than coal. Most new generation during that decade and more than 80% of new generation capacity built in the 2000s was fueled by natural gas.

Changing times. % of total generation by fuel ('000 MWh a day). Source: EIA

In the same way, today's boom in new natural gas as well as carbon-free wind and solar capacity means the next decade will belong to those fuels. The Energy Information Administration (EIA) shows that nearly 66 gigawatts in new natural gas capacity-around two-thirds of total additions-is either under construction or has been proposed between now and 2021. The bulk of the rest of new capacity come from wind farms-around 21.5GW-and solar arrays about 12.3GW.

Just five new coal plants are proposed, while dozens of facilities face retirement. In the decade from 2015 to 2025 about 10% of US coal power capacity is due to be shut, according to the EIA.

While the rise of natural gas and renewables looks baked in, the future of American power rests largely on the fate of the Clean Power Plan (CPP). The policy is straightforward: it sets emission limits for each state and tasks local governments with finding their own paths to meeting those targets, with the ultimate goal of reducing the country's emissions by a third from 2005 levels by 2030.

Naturally, though, it has met fierce resistance. The CPP's opponents scored a major victory in February this year, when the Supreme Court stayed implementation while legal challenges worked their way through the system. That could delay progress by a year or two.

Also hanging over the fate of the CPP is the presidential election. Hillary Clinton has pledged not only to follow through with Obama's initiatives but to extend the proposed emissions cuts. Donald Trump says he'd throw out the CPP, which would render any legal challenges irrelevant.

What's at stake isn't so much the overall trend in America's power mix. Coal's environmental problems aren't going away. Natural gas is abundant and likely to stay relatively cheap for years to come. Wind and solar, meanwhile, are getting cheaper. Instead it is the pace of existing changes that will be affected by the CPP. If the policy goes ahead, coal will see a steep decline over the course of the 2020s, losing about a third of its market share to gas and renewables. Without the CPP, the downward trend for coal is much gentler and renewables and gas's rise much slower. Either way, these are transformational times for American power.

Black gold crush: electricity generation with the CPP in place (left) and electricity generation without the CPP (right). Source: EIA

This article is part of a report on US energy. Next article: Promising future for US shale 

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