Will Trumps Executive Order be enough to turn around US coal generation?



Will Trumps Executive Order be enough to turn around US coal generation?

On March 28th, President Trump signed the long promised Promoting Energy Independence and Economic Growth executive order that will lay the ground work for unwinding of the Obama administration’s climate change regulation efforts. The Executive order gives EPA Chief Scott Pruitt the complex and lengthy legal task of rewriting Obama era Clean Power Plan and other carbon policies.

The Clean Power Plan (CPP), announced by President Obama and the EPA in 2015, was designed to reduce the CO2 emission by 32% from 2005 level of emission by 2030. As a result, coal burning units were the prime target for this reduction since coal burning units have the highest rate of CO2 emission among fossil burning generating units.

The Energy Independence executive order lays the ground work, the Pruitt EPA, however, has several very high legal hurdles before the CPP and other Greenhouse Gas Regulations can be removed and Trump can fulfil his campaign promise to remove restrictive regulations.  Assuming Trump and Pruitt are able to clear these legal hurdles will that be enough to help turn around a struggling coal industry. An industry with nearly a decade long decline.

Coal, once the dominant fuel for the US Electric industry, has faced significant head winds since 2008. Advancements in hydraulic fracturing creating an abundance of low cost natural gas, falling construction costs for wind and solar, and increased coal generation costs due to age and coal price hikes (due to increased overseas demand), and increased regulations have all created reduced coal generation and triggered numerous coal plant retirements.

Figure 1

Source: EIA

Challenges

The main contributor to coal’s troubles has been low natural gas prices. Since 2009, when natural gas wellhead prices dropped on average 54 percent from 2008 record prices, natural gas prices have remained low. These low natural prices have pushed down wholesale electricity prices and allowed natural gas units to displace coal generation. Current natural gas price forecasts do little to improve this picture as continued low prices are projected to remain for the near future.

Figure 2

Source: EIA

The aging US coal-fired generating fleet is further eroding coal generation’s viability. By 2020 the average age of the coal plants will be 45 years old. These aging plants will be facing lower capacity factors, compared to historical coal unit performance, with higher maintenance and repair costs, and environmental capital investments. Creating even tighter margins in a difficult energy market. 2015 saw 15GW of coal generation retirements, some of these as a direct result of Mercury and Air Toxins Standards (MATS). The addition of CPP regulations would have coals demise a fait accompli.

Figure 3

Source: ABB Velocity Suite

15GW of coal capacity came offline in 2015 while 18.7 GW of new non-coal capacity came online. Sixty-one percent of these additions were new wind and solar. Aided by federal tax benefits and Renewable Portfolio Standards (RPS) polices in 29 states and DC, the renewable production and investment tax credits (PTC and ITC) and declining renewable generations’ capital costs have led to large increases in renewable generation build up. These low cost units reduce both peak and off peak energy prices, further eroding coals revenue.

Summary

For nearly a decade coal has seen its production decline. Regulation, low natural gas prices, an aging fleet and renewables have pushed its largest consumer, coal generation to the margins. President Trump’s executive order, while splashy, doesn’t seem to be substantive enough to turn around coals future. Further, Mr. Pruitt faces a long and lengthy legal battles at the EPA to help enact this order. The removal of the CPP was paramount to maintaining coal past the 2020 time frame. However, with medium term gas prices remaining low or falling slightly and a coal fleet getting further past its prime, it is difficult to see a change to the industries decline.