The Economics of the Recent U.S. Shift Away from Coal for Generating Electricity

Oct 22, 2013

 The Montana Chamber of Commerce recently attacked EPA’s regulation of the emissions from coal-fired electric generators. That regulation, the Chamber argued, would have catastrophic consequences for both controlling carbon emissions and for the Montana and American economies.

            These criticisms of EPA’s attempts to clean up the emissions from coal-fired electric generators are part of a national campaign by coal interests that asserts that the federal government is engaged in a “war on coal.” Unfortunately these critics are massively confused on all of the basic facts.

            The main charge of the Montana critics of EPA’s expanded regulation of power plant emissions is that EPA’s regulation of those emissions is destroying the market for Montana coal. In fact, however, it was EPA’s regulation of sulfur emissions that help create the market for Montana’s and Wyoming’s Powder River Basin coal. Because Powder River Basin coal was low in sulfur, power plants around the nation turned to using that Montana and Wyoming coal to avoid the costs associated with capturing the high sulfur emissions that came from burning eastern coals. Without EPA’s regulations limiting sulfur emissions, Montana and Wyoming Powder River Basin coal would have remained a huge deposit of low Btu coal located in the middle of nowhere. It was EPA’s regulation of sulfur that turned our low-sulfur coal into such a valuable energy resource.

            The critics of EPA’s regulations restricting the emission of carbon from power plants also have argued that that regulation will destroy any incentive for American utilities and coal producers to develop commercially viable carbon capture technology. The opposite is true. If EPA does not regulate carbon emissions, there will be no incentive at all to capture and sequester carbon. No one would have any interest in such carbon capture technologies if they could freely emit all of the carbon they wanted. Just as EPA regulation of sulfur emission created incentives for the use of low sulfur coal, such as Montana’s, as well as a market for sulfur removal technologies, EPA’s regulation of carbon will have the same effect on the development of carbon capture and storage technologies.

            Those who see a “war on coal” being waged argue that EPA regulations are forcing Americans to use more costly fuels to generate electricity, natural gas rather than coal, making us poorer and hobbling our industry in global competition. Again, this turns reality on its head. Coal is losing market share in electric generation in the U.S. not because of EPA but because of low natural gas prices. Those low natural gas prices are a boon to American consumers and businesses. Even before natural gas prices came tumbling down and before EPA’s new regulations, electric utilities were turning away from using coal because natural gas plants were cheaper to build; they could be built more quickly and in smaller modular units so that utilities could follow load growth more closely; and, finally, natural gas plants were less polluting. 

            All of these advantages made the capital costs of building gas-fired electric generators lower than those of coal plants. When natural gas prices also fell to low levels, coal did not stand a chance in the competition.  Very few new coal-fired plants were built; even fewer are planned; and the older, less efficient coal-fired plants are being retired because they are too costly to operate.

            As a result, coal’s share of American electric generation fell from 53 percent in 2001 to 32 percent in April 2012, while natural gas’ share increased from 13 percent to 32 percent.  For the first time, natural gas and coal were providing virtually equal shares of the nation’s electricity.  

            EPA’s critics tell us that that regulation of power plant emissions is driving electricity costs up as those plants are forced to use more expensive fuel and install costly emission controls. But the U.S. Energy Information Administration data show that over the last five years overall electric prices in the U.S. have been flat despite the decline in our nation’s reliance on coal to generate electricity.

             Critics of EPA’s efforts to control emissions from coal-burning plants point out that U.S. carbon and other greenhouse gas emissions have fallen recently to levels not seen in many years, suggesting that there is no longer any need to regulate those emissions. What is conveniently ignored here is that those greenhouse gas emissions have fallen because the share of our electricity coming from burning coal has plummeted as the nation has turned to using more natural gas, which is much less carbon intensive, and renewable energy sources. If more coal had been burned, as the proponents of the “war on coal” hypothesis desire, those greenhouse gas emissions would have been higher. (Of course, the Great Recession and the slow recovery from it also reduced energy usage and greenhouse gas emissions.)

             There is no doubt that the U.S. coal industry faces challenges. But if we are searching for someone or something to blame, we should be blaming good old fashion market forces, market forces driven by the development of shale gas and oil resources such as in the Bakken region in eastern Montana. But most of the proponents of the “war on coal” hypothesis passionately believe that markets always do the right thing.  That ideological bias prevents them from seeing the strong market forces working against the expansion in the use of coal in the U.S. So instead they have twisted the facts to blame, that always convenient scapegoat, the federal government.