Coal faces more uncertainty than any other base-load generating source. Two new factors, hitherto irrelevant to the U.S. industry, will shape future generation investment—imports of liquefied...
Coal's Black Future
Turbulent politics and market trends cloud prospects for coal-fired power.
the dynamics of both markets were driven by push supply rather than pull demand, the spread varied between $1.00 and $1.50 per million Btu (MMBtu). At that spread, natural gas promised a cheap, abundant and clean alternative to coal. Low gas prices, relatively low plant construction costs, and growing public concerns over environmental issues made gas-fired plants the technology of choice. Investment in new coal-fired plants stopped for almost a decade, while natural-gas combined-cycle capacity increased rapidly.
The resulting boost in consumption, combined with declining traditional production, significantly increased natural gas prices to $7 to $8 from $2 to $3 per MMBtu in the late 1990s. While coal prices also have been under pressure from global demand and associated transportation costs, the coal-to-gas spread nonetheless has risen to about $5 per MMBtu.
At these prices, natural gas generation is uncompetitive versus conventional coal, even excluding GHG issues; it would have to decline to between $5 and $6 (see Figure 2) . But such price levels are unlikely based on North American sources, due to sustained demand from industrial consumers, physical production declines, weather-driven disruptions, and seasonal demand uncertainties. In fact, core-reserve depletion, combined with the increased reliance on non-conventional production, will lead to future lower levels of production.
Thus, while North America historically has been self-sufficient in gas, that’s changing. Incremental supplies will come in the form of LNG imported from overseas. The International Energy Agency anticipates the United States will import about 6 trillion cubic feet a year of LNG by 2030—about equal to the amount of additional natural gas needed to replace coal-fired generation under a flat-emissions restriction.
As the source of incremental supply, LNG likely will set the long-term price for all U.S. natural gas. But LNG is a globally-traded commodity with a more-or-less global price like crude oil, not a collection of separate local and regional markets like electricity. So the U.S. will be a price taker in this global market.
For at least the next few decades, the incremental global demand for LNG will continue to be for power generation—as it will be in the United States. Nuclear generation stands as the principal economic alternative to natural gas as a source of low-GHG electricity, putting an effective cap on LNG prices globally.
Of course, nuclear’s prospects in any jurisdiction depends as much on political and social factors as they do on economic questions. For example, France generates 80 percent of its electricity from nuclear, while neighboring Germany anticipates phasing out its remaining nuclear generation. But the global nature of the LNG market makes the nuclear alternative effective everywhere. In other words, if the global price of LNG (and the linked price of GHG emissions) rises too far, then some jurisdiction somewhere in the world will shift its next power plant from gas-fired to nuclear, and all jurisdictions will benefit from the resulting price cap.
In short, the emerging global market for LNG helps ensure that the United States has an alternative to coal-fired generation that’s acceptable from both an economic and a political standpoint. And that makes