Coal likely to remain most prevalent fuel for electricity generation

Coal is currently the dominant fuel for electricity generation and is likely to remain so, even if additional environmental control regulations targeting emissions of mercury, sulfur dioxide, nitrous oxide, and acid gases from coal power plants are implemented in the near future. Analysis included in the Annual Energy Outlook 2011 presents the results of alternate cases that anticipate the effects of these proposed regulations on the electric power sector. These alternate cases show that projected reliance on coal and natural gas generation in 2020 is sensitive to the extent of retrofits required, the length of the period over which retrofits can be amortized, and the level of natural gas prices.

Coal combustion results in emissions including mercury, sulfur oxides (SO_x), nitrogen oxides (NO_x), and acid gases. In order to reduce emissions of these pollutants, the Environmental Protection Agency (EPA) proposed the Air Transport Rule, regulating the emissions of SO₂ and NO_X, and the Air Toxics Rule, limiting emissions of mercury and acid gases. Both of these rules are considered in AEO2011 analysis.

Compliance with these rules may require pollution control technologies such as flue gas desulfurization (FGD) scrubbers and selective catalytic converters (SCRs). Currently, over half of the coal plants in the Nation already have FGD scrubbers and SCRs, so the regulations will affect plants without them—generally older facilities.

When faced with environmental regulations, operators must choose to either retrofit plants with needed equipment or retire them. The projected capacity of plant retirements is largely based on financial parameters, especially the anticipated period over which retrofit costs would be recovered and expected natural gas prices.

The AEO2011 includes six cases examining the impact of potential regulations on the electric power sector where natural gas prices and cost recovery period of pollution control equipment were adjusted. The four cases shown in the chart illustrate the range of potential impacts of these assumptions.

• Transport Rule & 90% Mercury Reduction Requirement: Coal generation in the Transport case is only slightly lower than the level in the Reference case. This case assumes the Air Transport rule, a limited cap and trade system for SO_x and NO_x, along with a 90% reduction requirement for mercury. Cap and trade allows for flexibility when reducing emissions, therefore retrofits are not always necessary to comply with the rule. Alternative compliance strategies included shifting to lower sulfur coal and dispatching uncontrolled units less.
• Retrofit required, 20-year recovery, reference case gas price: A requirement to install pollution control equipment does not result in any significant drop in coal generation as retrofitted coal plants are dispatched more often. This case assumes that all coal plants without a FGD scrubber and a SCR are required to install one by 2020. Natural gas prices are similar to the reference case and a 20 year capital recovery period for control technologies is assumed.
• Retrofit required, 20-year recovery, lower gas price (RRLG20): A reduction in future natural gas prices increases the share of natural gas in the generation mix relative to coal. In addition to a FGD scrubber & SCR requirement by 2020, this case also assumes a lower natural gas price than the Reference case. Lower gas prices in this case result in existing natural gas plants being dispatched more frequently. A significant amount of coal plants are retired, as the lower electricity prices resulting from lower gas prices make fewer retrofit projects economic.
• Retrofit required, quick cost recovery, lower gas price: This case is identical to the RRLG20 case, with the exception of a shorter 5-year capital recovery period for retrofit projects. This has the effect of making retrofit project less economic, which in turn results in more coal plant retirements and more generation coming from natural gas.

Coal plant retirements vary from 8.8 gigawatts (GW) in the Reference case to 72 GW in the Retrofit Requirements case with low gas price and quick cost recovery of capital investments. Currently there are 313 GW of installed coal capacity in the United States. Even with almost one quarter of the coal capacity being retired in the most extreme case shown, net generation from coal still exceeds net generation from natural gas in 2020.

Part of the Annual Energy Outlook Issues in Focus, exploring current and emerging issues in energy markets.