King Coal rules no more in the biggest electricity market in the world.
The combined impact of new technology and regulation means that there will be no new coal plants in the US, and even those already built are under a growing threat.
According to analysts at investment banking giant Citi: the growing impact of renewables and falling demand is squeezing the need for big new generators – and some existing ones – out of the market, and Barack Obama has just slammed the door shut on new coal with his new carbon emissions rules.
A new analysis by Citi says the business case for new coal plants in the US is already being eroded by the big increase in wind and solar capacity, declining demand and energy efficiency measures.
The new carbon rules announced by the Environment Protection Authority last Friday effectively price new coal out of the market – even if the carbon capture and storage technology does work. Citi suggests this will pave the way forward for a major restructuring of the US electricity market and a much greater focus on renewables, particularly solar.
“With the fall in renewable costs including solar and the significant drop in gas prices, it’s hard for us to imagine that IGCC plants with CCS will ever be competitive with other sources of generation,” the analysts say.
“The cost of renewables is falling fast. The fast learning rates for solar/renewables with depressed gas will make CCS’ cost competitiveness very difficult to achieve.”
The assessment of Citi is significant because the future of coal, or indeed any technology, is governed by the flows and costs of finance. Analysts at all major investment banks are now re-assessing the markets for fossil fues in the light of decisions such as Obama’s, and the recent limitations imposed by China, which have banned new coal generation in three key industrial areas, and put a cap on coal use.
Added to this is the continued fall in costs of renewables, which is changing electricity markets from the inside out, as well as an increased focus on “carbon budgets”. Those concerns and influences are working their way through to financiers, and on to the availability and the cost of funding.
As we reported yesterday, the coal industry responded to Obama’s new mechanism by immediately dropping their pretense that CCS was a viable, or even a nearly viable technology. The National Mining Asssociation dismissed the technology as “theoretical” and Democrat Senator Joe Manchin, who represents the coal state West Virginia in Washington and is its former governor, described it as “technologically impossible”
The EPA cited the Kemper project in Mississipi – the only generator in the US with CCS even partially installed – as a sign that CCS could be commercial. But Citi said Kemper had suffered cost over-runs and delays. Its estimates of the cost of “clean coal” suggest its costs are way above those of gas or solar. So even if it did work, it would be priced out of the market.
Citi puts the levellised cost of energy (LCOE) of a new integrated coal gasification plant (IGCC) with CCS at 15.6c/kwh ($156/MWh). That is way above the LCOE of a peaking gas plant (11.3c/kWh) and solar (13.6c/kWh). And solar, it says, is getting cheaper and is effectively “stealing” demand from fossil fuels at the most lucrative part of the demand curve, diminishing returns from incumbent generators.
Obama is ostensibly keeping the door open to “clean” coal as part of his “all of the above strategy”, but Citi says that even if the EPA rules are struck down by the courts, other regulations would likely come up. And, it says, there is doubt that even a loans guarantee program – which has been offered to nuclear and renewables – would be enough to bridge the financing gap.
Changing dynamics are also at play in the US market, and elsewhere for that matter.
Citi says energy efficiency rules in 25 states are likely to shave 6.3 per cent off 2011 electricity sales (the equivalent of Australian’s annual electricity production) by 2020.
Demand side management and increased distributed solar (on homes, factories and community level) is curbing demand growth in peak hours, and any growth in underlying demand for new industrial activity is being met by renewables and fast-start gas plants which are better suited to complement wind and solar.
Baseload generation, as has been seen in Germany and elsewhere in Europe, and in Australia, is being squeezed out of the market. In many countries, there is excess baseload capacity.
“The growth of renewables could partly provide the incremental generation needed to meet new load or to fill the gap left by retired plants,” the Citi analysts say.
“With renewables and the intermittency issue not completely resolved despite improvements in operation and technology, fast-start natural gas plants could be the kind of fossil-fuel power plant that complement wind or solar generation.
“Coal-fired power plants that are competitive with gas tends to be baseload and typically take much longer to start, therefore they are not ideal to complement renewables.”
Obama’s carbon restrictions on existing coal-fired generation are yet to be announced, and probably will not be until the middle of next year. There is a suggestion that Obama will be less strict with these rules, and it will certainty face fierce resistance from current operators.
But Citi suggests that may be academic anyway, given that pre-existing mercury rules, low natural gas prices, and other factors have already largely disincentivised building new coal plants. And it expects some 60GW of capacity to be retired. New rules would likely increase that amount significantly.