By Anna Mikulska and Michael Maher
Coal is losing the battle for the electricity future in the United States. Investment in new coal-fired generating capacity has dried up with its share of electricity generation dropping from 53% in 2000 to 34% in 2015. Also, the share of electricity generated from existing coal plants has been declining steadily. The trend can be ascribed to three major developments (1) low natural gas prices stemming from massive natural gas shale resources that became readily available over the last decade, (2) lower prices of renewable energy due to government subsidies and technological innovation (3) EPA regulations related to coal externalities such as mercury, cross-state pollution, etc. that, by requiring additional “scrubbing, or other control equipment” raise the cost of coal-fired power.
So what will replace coal as our staple of electricity generation? The competition for this important position in the U.S. economy seems to be between natural gas and renewables.
And even a simple perception of one of those resources winning the battle is crucial as it may propel policy choices and investments towards one or the other option and lock those choices for decades to come. Investment in natural-gas fired power plants with a typical life span of 30 years is first that comes to mind but also lack of such investment sets us on a path more likely to support other energy resources. These could be renewables but also coal or nuclear if renewables do not manage to provide the reliability the U.S. grid needs to operate effectively at a reasonable level of rates for consumers.
But is there just yet enough evidence to declare either natural gas or renewables the expected winner for policymakers to push?
Different analysts point to different measures and indicators of who the winner is. Most recently levels of investment have been under an increased scrutiny as the most important indicator for future viability of either natural gas or wind/solar. Thus, some point out that in 2015 wind/solar investment accounted for 67% of new power generation capacity in the U.S. while investment in new natural gas power capacity in 2015 accounted for 33% as an indication that wind and solar are winning the contest.
Figure 1.
Source: U.S. Energy Information Administration, Preliminary Monthly Electric Generator Inventory
Meanwhile others point to actual power generation as a more suitable indicator of performance. Here natural gas looks like the winner as natural gas-fired generation increased by ~200,000 kwh in 2015 vs. an increase of 20,000 kwh in utility scale non-hydro renewable generated power, despite the higher growth in new renewables capacity.
Figure 2. US Power generation: Natural Gas vs Wind and Solar, 2014-2015 Comparison
So how should we view the competition between natural gas and solar/wind?
Purely looking at “generating capacity” or “generation” may give the false impression that natural gas and renewables are substitutes for each other and, hence, either can replace coal in the same way.
Only natural gas can be a close substitute for the coal-fired base load and provide the same reliability. Solar and wind are intermittent and fluctuate based on sun and wind conditions and cannot provide steady base load power. Moreover, natural gas-fired power plants are flexible and can easily and quickly adjust output to fluctuations in demand : ramp up production to meet peak demands or ramp it down when demand falls, for example during evening hours. Weather-dependent, intermittent renewables are lacking this flexibility. In fact wind is more likely to blow at night rather than at pick afternoon hours. This makes renewables a hard sale as an ideal and exclusive coal substitute. And until science comes up with a solution such as, i.e. energy storage that can break away from the problem of intermittency, renewables will not be able to compete with either natural gas or coal for the dominant role in the US electric energy mix.
In this case how should we view the reported large increases in new renewable power generation capacity? Is there something else we are missing here that would allow renewables to take over natural gas and replace coal in power generation, despite their intermittency? And if they cannot replace coal, why do we see these increases at all?
On the other hand, should we be worried that natural gas power generation capacity does not grow at a comparable rate? Why didn’t we see more investment in gas-fired power plants in 2015?
To answer those questions it is important to recognize that, because of rapid and large increases in natural gas-fired power generation in the past decade and slowing of electricity consumption in the US over that period, there is significant spare natural gas capacity. Thus, gas-fired generation can be increased not only through new investment but, much more easily and less costly, by increasing the utilization of already existing capacity In fact, data indicates that gas-fired capacity utilization has been rising and that there is plenty of spare capacity to allow for even more generation from existing gas power plants. In 2005 capacity utilization of gas-fired power was 35%. Inn 2015, utilization of the US natural gas combined-cycle fleet averaged 56%. It was also the first time that gas-fired utilization exceeded coal-fired capacity utilization (55% in 2015 and down from 65% in 2005- see Figure 3). And there is room for the rate of utilization to continue to increase in these existing power facilities.
Figure 3
Meanwhile, deliverability of existing wind and solar facilities are maxed out based on solar and wind conditions. Thus, the only way to increase solar and wind production (other than natural variations in weather conditions) is to add new wind and solar capacity.
Consequently, focusing only on “new capacity additions” overstates the growth in renewables relative to gas-fired power generation as it misses the crucial factor: increased utilization of already existing gas-fired plants.
Second, renewables have a much lower utilization rate than generation using either natural gas or coal. The utilization rates are set by the number of hours and quality of the sunshine and the wind In 2015, average capacity factors for wind was 32.5%; solar PV – 28.6%; solar thermal 22.7%. In contract, the utilization rate of natural gas fired power-plants reached 56% in 2015 and this utilization has the ability to grow beyond that level in the future. Thus, the effective capacity additions of renewables approximately equaled that of natural gas in 2015 rather being twice that of gas as implied by “gross” capacity additions (68% vs 33% for renewables and gas respectively).
And this is “at best” since utilization factors for wind/solar also vary depending on location -based on weather patterns. Thus, to determine the actual “effective capacity additions” one needs to look deeper to where the renewable additions are occurring (i.e., capacity factors for solar much higher in Arizona than in Northeast, i.e. Great Plains have windier weather than say Ohio.) Wind and solar investment increases in the eastern Midwest and Northeast can be expected to have lower “effective” capacity than wind in the Great Plains and solar in the Southwest.
Looking to the future, capacity additions over a number of years will affect generation balance. As coal plants are retired in areas with little existing natural gas power, new gas-fired power plants must be built for gas-fired generation to grow in those areas; ramping up utilization of existing gas-fired capacity in Texas cannot provide additional electricity to Ohio as there are no grid connections to allow that flow of electrons. But in many areas, excess capacity in existing gas fired power plant will be enough for now to reduce utilization or even some retire some coal-fired power plants without adding new gas-fired capacity.
Thus, for now natural gas seems to be winning its “battle” with renewables based on its capacity to provide “base load” generation and system reliability. Natural gas capacity will also provide the flexibility needed to ramp up and down to meet daily and seasonal demand changes and daily and seasonal changes in output of solar and wind facilities. At the same time, gas-fired capacity will never get the 100% utilization as long as renewables are available, since on a marginal cost basis, renewables do not have the marginal fuel costs of gas-fired facilities. Average utilization of gas capacity thus may be limited far below nameplate capacity as renewables become more available.
Also, as renewable capacity grows further and electric grids becomes more integrated in and across regions, there will be more flexibility in the system to handle daily/seasonal variations in renewables by wheeling power from one area to another to changes in supply or demand, probably reducing the amount of “baseload” capacity needed. Efficiency efforts aimed at reducing peaks will lower the need for gas-fired capacity to ramp up at peak times. Breakthroughs in storage technology could also increase the reliability of renewables and cause natural gas-fired power to be utilized less as a “baseload” but rather as a backup to wind/solar or to meet peak swings in demand (although, one needs to note that storage could also allow gas-fired plants to run at a more steady state, storing excess electricity when demand drops and releasing power when demand increases; that would also reduce the average cost of gas-fired capacity.)
In either way, however, one cannot look just at either capacity adds or generation in one year to get an idea of changing electric generation sector mix. This approach does not reveal also the cost of the various options and cost is, of course, a major driver of future investment and operating decisions. Capacity additions and generation are poor proxies for cost, flexibility and reliability that will influence policymakers and investors. Subsidies, regulated rates, value of “reserve” capacity, time of day values, the valuation of “externalities,” etc. make cost comparisons difficult because analysts include different elements in their cost calculations.
Our main point today is that very short term investment and generation data cannot provide clear evidence of what the future will look like. In fact, as is, there is no real competition between natural gas and renewables to replace the base load feature of coal-generated electricity. Today only natural gas can provide suitable source of electricity generation that can replace base-load coal and the dispatching flexibility to meet daily changes in demand and thus, provide system reliability. But renewables are important element of energy mix as they resonate strongly with the environmental policies and climate change mitigation strategies. There is also a good chance that, as technological changes including grid flexibility, efficiency gains and breakthrough in energy storage take place and renewables overcome the issue of intermittency, they may become viable competitor in the future.
For now, however, the debate over which is the “coal” replacement in the US energy mix, natural gas or renewables, is ill-suited to the situation. Juxtaposing the two creates a false sense of a competition among “equal” substitutes. It gives a sense of black and white, one or the other choice to the public, investors and policy-makers. Meanwhile, there will be room for natural gas and renewables to grow in the electricity mix for years to come. Their rates of utilization may change but the two sources of energy are destined to be used together for some time into the future.
Anna Mikulska is a Scholar in Energy Studies at the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Michael Maher is a Senior Program Advisor at Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
