Natural gas will overtake coal to provide the largest share of U.S. electric power generation, said the U.S. Energy Information Administration in an early look version of its Annual Energy Outlook 2014 (AEO2014) report.
Projected low prices for natural gas make it a very attractive fuel for new generating capacity, EIA noted in the report, which was released on Dec. 16. In some areas, natural gas-fired generation replaces generation formerly supplied by coal and nuclear plants. In 2040, natural gas accounts in the EIA report for 35% of total electricity generation, while coal accounts for just 32%.
Generation from renewable fuels, unlike coal and nuclear power, is higher in the AEO2014 Reference case than in AEO2013. Electric power generation with renewables is bolstered by legislation enacted at the beginning of 2013 extending tax credits for various renewable technologies; which was passed after the AEO2013 Reference case had been completed, but was considered in an alternative case in AEO2013.
Good news for coal is that gas prices to rise quicker than expected
The Henry Hub spot price for natural gas in the AEO2014 Reference case is higher than projected in AEO2013 through 2037, with price increases in the near term driven by faster growth of consumption in the industrial and electric power sectors and, later, growing demand for export at liquefied natural gas (LNG) facilities. A sustained increase in production follows, leading to slower price growth over the rest of the projection period.
The Henry Hub spot natural gas price in AEO2014 reaches $4.80/MMBtu (in 2012 dollars) in 2018, which is 77 cents/MMBtu higher than in AEO2013. The stronger near-term price growth is followed by a lagged increase in supply from producers, eventually causing prices to settle at $4.38/MMBtu in 2020, which is still notably higher than in AEO2013.
After 2020, increases in natural gas spot prices are driven by continued but slower growth in U.S. demand and net exports. The Henry Hub spot natural gas price rises to $7.65/MMBtu in 2040, an increase of $3.28 from 2020 but 4% below the 2040 price projection in AEO2013.
In AEO2014, natural gas production grows to 37.5 Tcf in 2040, compared with 33.1 Tcf in AEO2013. A price increase starting in 2033 is far less pronounced than was projected in AEO2013, in part because the growth in net exports from the United States slows significantly.
The average minemouth price of coal increases by 1.4% per year in the AEO2014 Reference case, from $1.98/MMBtu in 2012 to $2.96/MMBtu in 2040 (2012 dollars). The upward trend of coal prices primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more expensive to mine.
The upward trend in the minemouth price of coal in the AEO2014 Reference case is similar to the trend in the AEO2013 Reference case, but the average price through the projection period in AEO2014 is generally lower, primarily reflecting a lower price outlook for coking coal, which is a more costly coal that is not burned in power plants, but is instead used to make steel.
Relative to minemouth prices, the average delivered price of coal to all sectors (excluding exports) increases at a slightly slower pace of 1.0% per year, from $2.60/MMBtu in 2012 to $3.43/MMBtu in 2040. The slower growth rate primarily reflects modest growth in average coal transportation rates, which increase by 0.2% per year in AEO2014—from $0.83/MMBtu in 2012 to $0.89/MMBtu in 2040—as a result of gradually increasing fuel costs and changes over time in the pattern of coal distribution.
Electricity prices to rise, in part driven by higher gas prices
Following the decline of natural gas prices since 2008, real average delivered prices for electricity have dropped consistently (although more gradually) since 2009, to 9.8 cents per kilowatthour (kWh) in 2012. Retail electricity prices are influenced by fuel prices, and particularly by natural gas prices. However, the relationship between retail electricity prices and natural gas prices is complex, and many factors influence the degree to which, and the timeframe over which, they are linked, EIA noted.
In the AEO2014 Reference case, electricity prices are higher throughout the projection than they were in the AEO2013 Reference case. Natural gas prices for electricity generators are higher than those in AEO2013 in the first few years but fairly similar in the long term. Reliance on natural gas-fired generation remains strong, as a result of additional near-term retirements of coal-fired and nuclear capacity, and natural gas prices continue to influence electricity prices.
In the long term, both natural gas prices and electricity prices rise. Electricity prices, which in 2030 are 10.4 cents/kWh (2012 dollars) in the AEO2014 Reference case, compared with 9.9 cents/kWh in the AEO2013 Reference case, continue rising to 11.1 cents/kWh in 2040 in AEO2014, compared with 11.0 cents/kWh in the AEO2013 Reference case.
Coal retirements help drive higher gas use in the power sector
Demand for natural gas in the electric power sector increases from 9.3 Tcf in 2012 to 11.2 Tcf in 2040, with a portion of the growth attributable to the retirement of 50 GW of coal-fired capacity by 2021, EIA reported.
Total coal consumption increases from 17.3 quadrillion Btu (891 million tons) in 2012 to 18.7 quadrillion Btu (979 million tons) in 2040 in the AEO2014 Reference case. Coal consumption, mostly for electric power generation, falls off in 2016, mostly due to the federal Mercury and Air Toxics Standards (MATS), which are due to take effect in April 2015, with two one-year extensions available to some power generators.
After 2016, coal-fired electricity generation increases slowly over the next 10 years as the remaining coal-fired capacity is used more intensively, but little capacity is added. Coal consumption in the electric power sector in 2040 is 17.3 quadrillion Btu (909 million tons) in the AEO2014 Reference case. This level is about 1.4 quadrillion Btu (75 million tons) lower than in the AEO2013 Reference Case.
Total U.S. coal production grows at an average rate of 0.3% per year in the AEO2014 Reference case, from 20.6 quadrillion Btu (1,016 million tons) in 2012 to 22.6 quadrillion Btu (1,121 million tons) in 2040. U.S. electricity generation accounted for 91% of total U.S. coal consumption (on a Btu basis) in 2012. Coal production declined by more than 7% in 2012, from 1,096 million tons in 2011, mostly in response to gas-on-coal competition.
In the Reference case, coal production recovers to 1,062 million tons by 2015, in response to a rise in natural gas prices along with a moderate increase in electricity demand. A wave of coal-fired generating capacity retirements in response to MATS requirements coincides with a secondary drop in coal production to 1,022 million tons in 2016. Total production then increases gradually to 1,127 million tons in 2030 before stabilizing as a result of limits on achievable long-term capacity utilization rates for available coal units compared to AEO2013.