Renewable energy generation costs lesser that coal

Lazard, the investment bank, has published new estimates highlighting wind and solar power generation to be far lesser than existing coal-fired plants in the US. This, in turn, could jeopardise President Trump’s ‘coal rescue plan’.

Background

Coal has been used to generate electricity in the United States since an Edison plant was built in New York City in 1882. The first AC power station was opened by General Electric in Ehrenfeld, Pennsylvania in 1902, servicing the Webster Coal and Coke Company.

Coal power in the United States accounted for 39 per cent of the country's electricity production at utility-scale facilities in 2014, 33 per cent in 2015, and 30.4 per cent in 2016. Coal supplied 12.6 quadrillion BTUs of primary energy to electric power plants in 2017, which made up 91 per cent of coal's contribution to US energy supply. Utilities buy more than 90 per cent of the coal consumed in the United States. However, the long, steady rise of a coal-fired generation of electricity started to face a decline after 2007. The decline can be attributed to the increased availability of natural gas, decreased consumption, renewable power, and more stringent environmental regulations.

Analysis

New estimates have been published by Lazard which show that it can often be profitable for US coal generation companies to shut their working plants and replace them with alternative and renewable sources such as wind and solar power.

The report suggests that many coal plants are already in their retirement stage and  is expected to hit a record high this year. Some companies that have announced their closures are FirstEnergy and American Electric Power. In addition, some new plants are also being shut down as they are not economically viable.

Lazard estimates that the all-in levelized cost of electricity from a new wind farm in the US would be $29-$56 per megawatt hour sans any subsidies — such as the federal Production Tax Credit. On the other hand, the marginal cost of operating a coal plant is $27-$45 per MWh. Therefore, it is  efficient and economical in building a wind farm without any subsidy when compared to a coal plant. Subsequently, when the PTC is included, it can cut the cost of wind power to as little as $14 per MWh, and the economic rationale  becomes even stronger.

Xcel Energy, the Minneapolis-based utility group, is one of the pioneers of this model. In August, they approved its plan to shut 660 MW of coal-fired capacity and replace it with 1,100MW of wind, 700MW of solar and 275MW of battery storage. The company said the plan would save about $200m for customers.

Furthermore, Public Service Enterprise Group have adopted the same. They have closed its last two coal plants in New Jersey and proposed to its state regulator a $4bn six-year investment plan based principally on energy efficiency improvements.

In an attempt to ‘bring back coal’ in the US, the U.S. Department of Energy’s Notice of Proposed Rulemaking (NOPR) directed the Federal Energy Regulatory Commission (FERC) to subsidise coal. This subsidy would prop up the struggling coal and nuclear power plants that would help coal generation in the highly competitive market.

However, this decision was a significant blow for the Trump administration as it was opposed by nearly every side of America’s electricity industry. Additionally, FERC had estimated that by the end of 2020, 74 more coal-fired plants will be shut down with a total generation capacity of 20.7 gigawatts.

Counterpoint

On the contrary, US coal production picked up last year, due to strong exports. The industry employs about 2,100 more people than it did when Mr Trump took office, an increase of about 4 per cent.

The rising demand for coal, specifically in Asia as both China and India due to their high dependence on coal-based electricity would increase the supply from the US. Coal exports in the US has increased by 61% in 2017 as exports to Asia have more than doubled.

Assessment

Our assessment is that traditional coal generation is definitely seeing a gradual decline in demand due to competition as renewable sources is more environmentally friendly and economical to produce. However, we believe the issue of loss of employment could be partially solved through compensation or substitution in alternatives sources of service. While we understand the motive for allocating subsidies is to maintain the current levels of employment, it hampers competition and increases the tariffs for consumers.