April 19, 2013
Gas Continues Assault on Coal
The Disruptive Innovation of the Shale Revolution
Coal, a widely-distributed fuel that we have long relied on to power everything from homes and businesses to factories and trains, is being upended by the disruptive innovation of the shale gas revolution.
The ongoing displacement of coal by natural gas in the US electric generating sector was neatly illustrated in two recent articles. The Washington Post examined it from the perspective of utilities faced with expensive decisions about which fuel to bet on for the future, while the Wall St. Journal looked at the resource and tax implications of this trend for states. The intensity of competition between coal and gas would have been hard to imagine just a few years ago, when the price and energy security advantages of the former seemed insurmountable. The shale gas revolution continues to upend conventional wisdom on energy.
It's worth recalling that coal was once a widely-distributed fuel, powering homes, businesses, trains and factories, as well as power plants. Most of its decentralized applications yielded to competition from the post-World War II oil boom, resulting in a nearly 40% decline in US coal demand between 1945 and 1960, on a BTU basis. Coal got its second wind in response to the energy crises of the 1970s, when its promise of more than a century's worth of secure, low-cost supply trumped concerns about the environmental impacts of its extraction and consumption. From 1972 to 2000 coal, together with nuclear power, displaced roughly two-thirds of the petroleum used in US power generation. That freed up oil for other, more valuable uses and solidified coal's energy security benefits in the minds of the public and policy makers. In the process, coal's share of generation expanded from 44% to 53%.
Much has changed in the last few years. From 2007 to 2011 a weak US economy and the rapid expansion of natural gas and oil production from unconventional sources shrank net US petroleum imports by nearly 30%, while increasing the country's effective energy independence — domestic production of all energy sources as a fraction of total consumption — from 70% to 80%. That lessens the salience of energy security, for which the gas and renewable energy sources perceived to be competing with coal can claim comparable benefits, along with domestic job creation. And the gas supplies that constitute the main competition for coal are, in contrast to earlier gas booms, backed by resources with useful lives that could rival those of the nation's coal deposits.
Based on recent gas prices, the cost of electricity produced by high-efficiency gas turbines now rivals coal-fired power from existing power plants and beats it for new capacity, and with fewer drawbacks. Based on data from the Department of Energy for the 12 months ending this September, natural gas now commands a 30% share of the electricity market, having reduced coal's share from 43% to 37% in just the last year.
That's the context for the lengthy Washington Post article, which in the print edition was entitled, "The Coal Killer." As an example of that premise, it highlights the impending retirement of the 745 MW coal- and oil-fired Salem Harbor, MA power plant that Footprint Power purchased from Dominion last year. Footprint intends to shut down the remaining two operating units, demolish the facility, and replace it with a 630 MW state-of-the-art combined-cycle gas turbine plant. The article goes on to mention several other cases of coal plants being replaced by gas units. The quoted comments from various observers also underline the tension between views of natural gas as a bridge to a cleaner energy future and gas itself as that future.
As the Wall St. Journal article makes clear, the consequences of this trend extend upstream and downstream of the utilities and their power plant portfolios. The surge of shale gas production since about 2006 has reduced both gas and coal prices, resulting in lower energy costs for consumers and industry. That has led to a revival in some US manufacturing sectors, including petrochemicals and steel. However, it has also resulted in coal mine closures and reductions in taxes derived from coal production. This is felt most acutely in states like West Virginia and Wyoming, where both state and local budgets have been affected.
It's premature to extrapolate the ultimate outcome of this competition. Large uncertainties could affect its course, including environmental regulations, future demand — including gas exports — and advances in technology such as carbon sequestration. This is especially true globally, with shale gas outside the US generally at a much earlier stage of development. Where conventional gas remains expensive, coal use is still rising. In any case, the history of past energy transitions suggests that old energy sources never entirely fade away; coal may continue to lose market share in the US and become more of an export commodity, but it's unlikely to disappear entirely. Meanwhile, shale gas looks like a classic disruptive innovation, the implications of which will play out over many years in ways we might not imagine today, near its start.
Geoffrey Styles is managing director of GSW Strategy Group, an energy and environmental strategy consulting firm. His industry experience includes leadership roles at Texaco Inc., and he is the author of the blog Energy Outlook. Originally published by Pacific Energy Development.