Coal’s 2021 Resurgence and What It Could Mean for Emissions, Consumers
Posted October 1, 2021
Natural gas prices have entered rarified territory due to demand outpacing production and supply, creating headwinds for the Biden administration’s emissions reduction goals and potentially impacting the energy cost savings consumers have enjoyed since the U.S. energy revolution launched more than a decade ago.
Prices in Asia Pacific (Japan-Korea) settled at $29.20 per million Btu (mmBtu) on Sept. 27 – their highest on record since 2012. Meanwhile, U.S. natural gas prices of nearly $5.50 per mmBtu at Henry Hub were relatively inexpensive compared with international ones but rose to their highest for the month since 2008. Natural gas prices like these are unusual for the fall, before there’s reason to believe the approaching winter could be particularly cold.
Besides increased costs for consumers, higher natural gas prices generally reduce the cost advantage that natural gas has had – throughput most of the energy revolution – over coal in electricity generation, boosting coal use and potentially increasing carbon-dioxide (CO2) emissions. That looms as a potential setback for efforts to reduce emissions, remembering that the increased use of natural gas is the No. 1 reason that U.S. power sector CO2 emissions are at their lowest levels in a generation.
In fact, the U.S. Energy Information Administration (EIA) projects that U.S. total energy-related CO2 emissions could rise in 2021 and again in 2022, at the same time as the Biden administration is committed to reducing U.S. emissions by 50% below 2005 levels by 2030.
If EIA’s projections prove to be accurate, this would effectively mean that even greater emissions reductions are needed by 2030 than the administration thought. Also, since EIA expects emissions to increase through 2022, there could be two fewer years (that is, beginning in 2023 instead of 2021) in which to achieve the goal.
In general, if one economically tries to achieve a greater objective in a shorter time frame, the effort could cost more than anticipated.
It’s also important to keep in mind that emissions fell in 2020 because of a painful economic recession associated with the pandemic. And the magnitude of annual emissions reductions the Biden administration wants historically has only come about because of recessions. The administration needs a plan to ensure its commitment can realistically be achieved – and at a reasonable cost to consumers – without tanking the U.S. economy.
At the same time, natural gas prices directly impact households, small businesses and industry, as well as power producers nationwide – especially in Midwestern and Northeastern states. Natural gas prices can also affect consumers secondarily, since retail electricity prices in many states must eventually reflect fuel prices, due to adjustment clauses.
Cogent energy policies are the ultimate key to sustain downward pressure on prices as well as environmental progress driven by natural gas in power generation. Let’s go into the details, starting with the bottom line for households.
The Bureau of Labor Statistics Consumer Expenditure Survey reports that U.S. households spent an average of $414 on natural gas in 2020, which was 22% lower than in 2008. Adjusting for price inflation over the period, real consumer expenditures on natural gas decreased by 35.2% between 2008 and 2020.
Some regions have historically saved more than others. Households in the Midwest and Northeast each spent more than $600, on average, in 2020, while those in the South and West spent $246 and $378, respectively, for the year. Consequently, for example, Midwest consumers actually saved $378 in 2020 compared with 2008, adjusting for price inflation, and this savings was as much or more than households in the South and West usually spend on natural gas in an entire year.
In other words, natural gas has continued to be a critical fuel, especially in relatively colder states, and its nationwide average retail prices rose by 11.2% year on year (y/y) through the first half of the year per EIA. If sustained, this could erase about one-third of historical consumer benefit from lower expenditures on natural gas.
Accordingly, ensuring that natural gas stays affordable should be on the Biden administration’s radar. The best way to sustain downward pressure on prices is to support domestic production: 1) through access to resources; 2) by building pipeline and processing infrastructure; and 3) recognizing in proposed energy plans that natural gas is a cleaner fuel, which in turn could affect long-lived investments in its development. Unfortunately, the administration has taken precisely the opposite approach in each policy area, including an indefinite pause in new federal leasing that could decrease domestic production.
Next let’s turn to U.S. electricity net generation and energy-related CO2 emissions.
U.S. net generation from natural gas fell by 37.8 million megawatt hours or 5% y/y over the first half of 2021, according to EIA. Coal use in power generation increased by 112.5 million megawatthours or 34.7% y/y over the same period – three times the amount by which natural gas fell.
Coal’s outsized resurgence has been a function of its relative economy and higher natural gas prices, coupled with shortfalls in electricity production from conventional hydroelectric and nuclear generation in some regions. But it also suggests higher emissions.
CO2 emissions from coal rose by 29% in the first half of 2021 and could increase by another 19.8% by year’s-end, according to EIA estimates. These are emissions only from coal. In total, EIA expects U.S. fossil-fuel emissions to rise by 7.9% y/y in 2021 and effectively erase about four years’ of the average annual emissions reductions that occurred between 2005 and 2020.
In its latest Short-term Energy Outlook (STEO), EIA expects higher U.S. coal-related emissions to persist through 2022. Specifically, EIA projects that coal power-related CO2 emissions will increase by 194 million metric tons (mmt) to 1,068 mmt in 2021 and maintain a similar level of 1,045 mmt in 2022. This power-sector projection is central to EIA’s expectation that total U.S. CO2 emissions could increase in 2022.
Each year in which emissions increase consequently makes the Biden administration’s fixed 2030 commitment that much more challenging and potentially costly to meet, since it would require even greater reductions be made in an abbreviated time frame.
For example, if emissions rise as EIA projects in 2022, annual reductions of 258 mmt or 6.1% per year would be needed between 2023 and 2030 to meet the administration’s emissions reduction target. However, other than the recessionary years of 2009 and 2020, there’s not one year since 1990 where emissions decreased by at least 258 mmt. In fact, the largest decrease without a recession occurred in 2012 (217 mmt), and that decrease was driven by natural gas substitution for coal.
To be clear, the Biden administration made an international commitment that requires the U.S. to consistently reduce emissions by 2030 in large quantities that have only coincided with some of the worst recessions in U.S. history.
Let’s examine the regional and state-level changes this year. EIA regional data based on hourly grid monitoring are the most timely available and through August 2021 showed that regions with coal-fired power plants and coal availability generally consumed relatively less natural gas in the power sector.
By contrast, New York, New England, California and the Northwest – the regions that tend to be the most constrained in natural gas pipeline capacity – have required more natural gas for power so far this year.
With a lag of two additional months, we have state-specific EIA data, as presented in the following table, ranked from greatest-to-least coal additional coal consumption through the first half of this year.
The top 25 states with increased coal consumption collectively generated 111,258 megawatthours (mWh) more electricity from coal and 39,016 mWh less from natural gas in the first half of this year than they did in same period in 2020. For these states, this amounts to nearly two-thirds more coal consumption than there was in 2020.
Coal’s resurgence this year offers a couple of lessons.
For one thing, the orderly dispatch of existing power generation is economic behavior that one should desire and expect to continue. However, this also implies that observed market share changes in the power sector (natural gas in power up – and related emissions down – over the past decade) require smart energy policies to cement this tremendous progress. Consequently, ambitious long-term political commitments that are not grounded in cogent alignment with regional and state-specific grid capacities and requirements could fail outright and ultimately undermine the Administration in making future commitments.
Furthermore, myopic policy commitments could intentionally constrain power producers from making economic choices, which brings us back to consumers and the health of household budgets that are vital to U.S. economic security. People generally vote based on their pocketbooks.
When we have already just seen the highest natural gas prices since before the energy revolution, we need smart energy policies that enable domestic production while also fostering new technologies, so consumers can afford the energy transition.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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