Coal and natural gas are the two most commonly used fossil fuels for electricity generation in the United States. Historically, coal has been in the dominant position, hovering around 50% of generation until summer 2008 but that percentage has been declining. In April 2015, the United States electricity market witnessed a fundamental change in generation: Gas-fired generation (92,979 Thousand MWhs) surpassed coal generation (88,653 Thousand MWhs) for the first time, signaling a continued trend of shifting away from coal overall (Figure 1). It is widely expected that 2016 will be the first year that natural gas power burn exceeds coal generation on an annual basis.
Natural gas power burn has historically ranged between 20% and 50% of total U.S. gas consumption. Figure 2 shows that as the total consumption for natural gas increased over the years, gas power burn has been rising proportionally. Due to seasonality, gas power burn and consumption usually peaks in the summer months for cooling, while total gas consumption peaks during the winter months for heating.
Since 2011, over 90% of the increase in domestic natural gas production has happened in the seven most prolific shale formation regions including Marcellus, Utica, Haynesville, Eagle Ford, Permian, Niobrara and Bakken as shown in Figures 3 and 4. The aggregate growth in shale gas production has been the dominant contributor to the overall U.S. gas production growth, accounting for 53% of total production in June 2016. Particularly in the Marcellus shale regions in Pennsylvania, East Ohio and West Virginia, natural gas production was nearly at its peak at 17.8 Bcf/d in September 2016.
Abundance in supply, sustained high storage levels and relatively low gas prices (compared to coal on MMBtu basis) have made power producers favor gas over coal. On top of this, environmental regulations also accelerated the switching from coal to gas. The Environmental Protection Agency’s (EPA) Clean Power Plan 1, among other regulations, requires coal-fired power plants to reduce their carbon dioxide emissions through additional investment in technology, driving costs of electricity generation from coal even higher. This rule imposed by EPA has accelerated the shutdown of coal mines and failure to renew mining permits in United States
Midwestern and Mid-Atlantic regions have been impacted the most due to the recent pipeline expansion that increases transmission capacity as shown in Figure 5. Gas produced from Marcellus, Utica, Eagle Ford and Permian can be conveniently delivered to these regions for power generation, resulting in significant influence on the economics of power generation for ISO/RTOs including PJM, Midcontinent ISO (MISO) and Electric Reliability Council of Texas (ERCOT).
The absolute level of electricity load varies due to weather, temperature, outages and economic activities. To better investigate the competing nature of coal and gas for generation, and to adjust for the impact of load fluctuation, the percentage of each fuel type representing overall generation is used for analysis. However, natural gas power burn and power generation depend significantly on seasonality. To accommodate this pattern, a Loess-based decomposition method is used to remove seasonality from electricity fuel source data in ERCOT, MISO and PJM regions. This decomposition method 2 suits well for our analysis as the fuel mix percentage is additive and it is robust to a few outliers compared to simple averaging methods.
Generation Fuel Sharem= Seaonalitym+ Trendm+ Residualm
where m represents one calendar month
As shown in Figure 6, in the PJM region, the increase in gas production in Marcellus facilitated the convergence of coal and gas generation share since 2010. Coal generation decreased from 55% to 35%, accompanied by a significant increase in gas generation share from 9% to 25% in the trend component. The seasonality graph clearly shows the strong summer and winter power generation peak from coal. As for gas, the power burn swings up to 3% in summer and down to -2% in winter time. The remaining 30% to 40% of electricity generation is primarily from nuclear plants. As nuclear plants are relatively more efficient and non-intermittent, they usually serve as the base load in the generation stack, compared to the marginal fuel such as coal and gas.
MISO region analysis is limited to the period between January 2013 and September 2016 due to data availability.3 In Figure 7, Coal has traditionally been the dominant fuel for electricity but decreased from over 70% to below 50% from Jan 2013 to Sep 2016 using the deseasonalized trend methodology. In contrast, gas has been increasing from around 5% to well above 20%. Supplied mainly by Powder River Basin Sub-bituminous coal, the MISO and ERCOT regions are impacted the most from the relative cheap price of natural gas compared to coal as shown in the graph. As the two prevailing fuel types, coal and gas combined represent around 75% of generation. Nuclear plants provide base load for another 15%, while the remaining range of 5%- 9% electricity comes from wind generation.
In the ERCOT region in Figure 8, gas and coal each have been accounting for around 40% respectively in the past few years. However, beginning in the summer of 2014, their respective share starts to diverge as gas power burn share shows a clear upward trend to 45%, while coal generation share declines close to 30%. The seasonality graph shows that gas still experiences a positive swing up to 6% of overall generation in the summer. Coal shows more modest variation with approximately 2.5% upward swing in the winter. Note that for this region, growth of wind generation has also been a major contributor to the decline in coal generation, accounting for around 10% of generation and growing. Nuclear plants generate around 10% of electricity in this region.
With the adoption of the Paris Agreement within United Nations Framework Convention on Climate Change (UNFCCC), developing and developed countries have embarked on a long term path for emission reduction. The overall trend to retire coal generators, utilize natural gas and other renewable energy source for electricity generation endures. Nationally and regionally, the diminishing share of coal generation will likely continue due to the abundant supplies of natural gas and other renewable energy sources. For next article, we will take a deep dive into the list of factors that contribute to the coal-gas switch for electricity generators in the above region and the impact of electricity prices in the deregulated market.
Disclaimer: This information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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