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COLUMN-U.S. EPA goes (relatively) easy on coal: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, June 4 (Reuters) - Despite the heated war of words between supporters of the coal industry and environmentalists, the Obama administration's Clean Power Plan is relatively generous to coal interests.

By carefully selecting the baseline against which emission reductions will be measured and giving states a long period to come into compliance, the proposed rule is much less radical than it appears.

The principal effect of the regulations, if they are implemented, would be to foreclose any return to coal-fired power generation if natural gas prices rise in future.

"The proposed guidelines are based on and would reinforce actions already being undertaken by states and utilities to upgrade ageing electricity infrastructure," according to the Environmental Protection Agency (EPA). "The guidelines would ensure these trends continue."

COAL IN THE CROSS HAIRS

The proposed rule, which would cut nationwide emissions 30 percent from a 2005 baseline by 2030, applies to emissions from all existing fossil-fuel power plants, but the real target is coal.

Gas-fired plants produce just half the carbon dioxide emissions of coal, and oil-fired generators account for less than 1 percent of U.S. electricity consumption, so any substantial reduction in emissions will most likely have to come from the coal sector.

Coal-fired generation has been declining owing to the abundance of cheap natural gas thanks to fracking.

Coal generation has already fallen by more than 21 percent between 2007 and 2013, according to the Energy Information Administration. Coal's share of generation has shrunk from almost 50 percent to just 39 percent since 2007, with gas making up about half the difference.

The Clean Power Plan ensures the switch from coal to cleaner-burning gas and renewables will continue even if the economics of gas become less favourable in future.

Financial Times columnist Edward Luce has likened it to a giant bet on gas. The Obama administration's professed "all of the above" strategy has become "one of the above" ("Obama's bet on gas throws caution to the wind", May 18).

SELECTING THE BASELINE

Senior officials within the administration make little effort to hide their disdain for coal, leading to complaints from politicians in coal-producing states and some utilities that the president is leading a "war on coal".

Nonetheless, the proposals are relatively generous to coal interests and would ensure a fairly gradual transition.

The baseline from which emission reductions will be measured is the most favourable the coal industry could have been given: 2005 was virtually the peak for coal-fired power generation (Chart 1).

Coal generation has already fallen more than 20 percent since 2005. Greenhouse emissions from the electricity sector were down almost 16 percent by 2012, and have probably fallen further in 2013-14, mostly because of the switch from coal to gas and renewables, according to government data ("Inventory of U.S. Greenhouse Gas Emissions 1990-2012", April 2014).

OLD AND INEFFICIENT UNITS

The long implementation period is also favourable to the coal sector and utilities. States do not have to submit their emission reduction plans until 2016-2018. The federal government anticipates states and utilities will have up to 15 years to achieve the full reductions by 2030.

Many existing coal-fired power plants are already very old and would almost certainly be retired before the end of the next decade.

Almost no coal-fired power plants have been built since 1994. Virtually all new fossil-fuelled capacity has been natural gas.

The capacity-weighted average age of bituminous coal-fired power plants is 44 years compared with just 13 years for gas-fired plants (Chart 2).

Roughly half the fleet of coal-fired power plants was built in the 1950s and 1960s. Most of these older plants are very small and use inefficient subcritical boilers rather than more modern supercritical and ultra-supercritical ones. Supercritical and ultra-supercritical plants generate more electricity from the same amount of fuel and thereby reduce emissions per kilowatt-hour.

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Chart 1: http://link.reuters.com/gyc89v

Chart 2: http://link.reuters.com/jyc89v

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Power plants do not last forever. Most of these older plants are nearing the end of their service lives and must either be retired or refitted with expensive new boilers and heat exchangers as the old ones wear out.

Most would also need the addition of expensive flu-gas scrubbers to reduce emissions of mercury and other toxic substances from their smoke stacks.

Coal advocates blame the Obama administration for forcing the closure of many coal-fired power plants by imposing expensive new emissions regulations.

In fact, coal-fired plants have been closing steadily since 2004. Most of the units that shut have been smaller, older plants dating from the 1950s or even before which owners have decided are not worth upgrading: it is simply not economic to refit them when cheaper alternatives exist in the form of gas or even ultra-supercritical technology.

Even before the proposed rule was published, 163 coal-fired generating units with a net summer capacity of almost 23,000 megawatts were scheduled to close between 2014 and 2017, according to the Energy Information Administration.

USING A RATCHET EFFECT

The Clean Power Plan would give states and utilities considerable flexibility in how to meet their mandated reduction targets.

Existing coal-fired generation could be switched to natural gas, renewables or even larger and more efficient ultra-supercritical boilers. States and power companies could use emission trading schemes to pay for cheaper reductions elsewhere.

In the final analysis, though, the Clean Power Plan employs a ratchet effect. It banks the existing emission reductions from switching out of coal since 2005 and the likely power plant retirements over the next 15 years and ensures they cannot be undone even if gas prices rise and coal becomes more attractive once again.

The plan more or less guarantees a growing market share for gas (which is one reason why the strategy has received quiet backing from some of the major oil and gas producers). It will also make it very hard for coal to stem or reverse its declining market share, no matter how low coal prices fall.

Coal's long-term fortunes would depend on the uncertain implementation of carbon capture and storage (CCS), but there are no successful utility-scale demonstration projects yet in operation and the technology remains far from commercialisation. Even then, coal would be less attractive than natural gas.

The EPA estimates coal would still meet about 30 percent of U.S. power demand in 2030 under its new rule, down from 39 percent in 2013 and 37 percent in 2030 if nothing is done. Domestic coal production would be 20-28 percent lower than if the proposed rule were not enacted, according to the agency's regulatory impact assessment.

But the agency will almost certainly seek even more emission reductions beyond 2030, which will likely squeeze coal's share even further in the long term.

Coal supporters and environmentalists are therefore both partly right in their assessment of the plan's effects: the Obama administration is unenthusiastic about the long-term future for coal and is plotting its gradual demise, albeit more slowly than the heated rhetoric implies.

(Editing by Dale Hudson)