Who Killed the Coal Plant?

on June 18, 2012 at 2:30 PM

The coal industry is ramping up its campaign against President Obama and the EPA, criticizing the administration for attempting to regulate the industry to death. A $1 million ad buy from American Commitment, a conservative advocacy group, decries “Obama’s war on coal” and targets EPA’s recently finalized rule to limit toxic mercury pollutants from power plants, known as the “Utility MACT rule.” The rule will require power plants to install technology to limit toxic mercury emissions. The Senate could soon vote on a resolution that would kill the rule. The coal industry and other conservative groups claim the rule will force utilities to install expensive equipment, which will drive up the cost of energy and kill jobs. EPA’s proposal in March to begin regulating greenhouse gases on new power plants further enraged the industry.

Coal’s dominance in the electric power industry has begun a period of rapid decline. Data from the Energy Information Agency (EIA) shows that the share of electricity generation in March from coal was at its lowest monthly total since 1973. For decades, coal typically represented half of the nation’s electricity generation, but it dropped to only 34% for the month of March. The decline can be partially attributed to warm weather, causing low demand for electricity overall, but there is a reason that coal’s share fell much faster than other energy sources – and it’s not the EPA’s regulations.

The real threat to the coal industry is not some politically-motivated “War on Coal;” it is cheap natural gas that is killing coal. The EIA report represents a milestone in the energy industry, confirming trends underway for some time. Growing natural gas production across the country is rapidly eroding coal’s share of the electricity market. Technological breakthroughs in hydraulic fracturing and horizontal drilling have allowed drillers to extract gas from shale rock at low cost. This has unlocked enormous quantities of natural gas, causing prices to plummet from above $10.50 per million Btu (MMBtu) in 2008, down to below $2/MMBtu this year. Low prices are forcing utilities to shift away from coal towards natural gas. The EIA projects that natural gas consumption in the electric power sector will increase by an astounding 21% in 2012 from a year earlier, while coal consumption will decrease by 13%.

Contrary to coal industry claims, the erosion of coal’s position is due to market forces, not regulation, as many of the regulations proposed under the Obama administration so loathed by the coal industry have not yet taken effect. Instead, it is becoming increasingly difficult for coal to compete with natural gas on price.

Regardless of whether or not the campaign to kill the Utility MACT rule is successful, coal plants pose significant financial risks to investors. Coal plants require high fixed construction costs and their economic viability is based on 30-40 year lifespans. Investors must have long-term certainty that those costs can be recovered over that lifespan. A sustained period of cheap natural gas would put that return on investment into question.

Additionally, the coal industry’s claim that government regulation is killing jobs seems to ignore the fact that the loss of jobs in the coal industry correspond to a surge in employment in the natural gas industry. IHS Global Insight estimates the natural gas industry supported 1 million jobs in 2010, and it will create an additional 500,000 jobs by 2015. Shale gas drilling has expanded so rapidly that the hotel industry in Pennsylvania is booming as local housing cannot satisfy the influx of new workers. This is an example of ‘creative destruction,’ a phenomenon that the free market enthusiasts like those claiming a “war on coal” supposedly support.

To read Breaking Energy coverage of Duke Energy CEO Jim Rogers addressing the natural gas versus coal issue, click here.

The coal industry and other conservative groups are spending millions of dollars to derail the Utility MACT rule and other environmental regulations, but they have identified the wrong enemy. The real threat to their long-term survival is the natural gas industry. They are being beaten in the very free market that they claim they support, and to overcome that open competition, coal is trying to rig the game by undermining critical environmental protections.

Nick Cunningham is a policy analyst at the American Security Project, a non-profit, bipartisan public policy and research organization dedicated to fostering knowledge and understanding of a range of national security issues.