A good day for natural gas:
New Carbon Rules Unlikely to Start Energy Revolution
By CLIFFORD KRAUSS
New York Times
JUNE 2, 2014
The Ivanpah solar energy generating system in the Mojave Desert in California near Primm, Nev. Improvements in technology are reducing the costs of renewable energy, which have historically been higher than fossil fuels. Credit Ethan Miller/Getty Images
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The new carbon pollution rules the Obama administration announced on Monday will help spur the natural gas industry and renewable energy like wind and solar power, but executives and analysts said they did not necessarily see an energy revolution in the making.
The intent of the Environmental Protection Agency proposal to slash carbon dioxide emissions is to reduce dependence on coal, which generates roughly 40 percent of the nation’s electricity.
To achieve that goal, states will be given broad flexibility, meaning that reductions in coal use will come not only from relying more on other power sources, but also from making homes and buildings more efficient, both of which are already happening.
“I don’t think it’s a revolution because our carbon emissions are already going down because of cheap natural gas,” said Michael Lynch, president of Strategic Energy and Economic Research, a consultancy. “It’s not Obama’s war on coal. It’s reality’s war on coal. Natural gas turns out to be better than coal in the marketplace.”
And because states vary in their energy use, the local impact of the regulations will also vary.
Over all, consumers and industry may see their electricity rates rise over time because coal remains the cheapest power source, but those increases could be softened as demand falls with mandated efficiency improvements, energy specialists said. At the same time, improvements in technology are already reducing the costs of renewable energy, which have historically been higher than fossil fuels.
Changes for the economy and energy businesses are likely to be modest, at least in the short term, analysts said. In an investment note, FBR Capital Markets emphasized that the national carbon emissions reduction target of 25 percent by 2020 from 2005 levels, when carbon emissions were at their highest level before the recession, would actually mean a reduction of only 11.5 percent from 2012 levels. A 30 percent reduction from 2005 levels is mandated by 2030, and much of that could come from replacing the current housing and office building stock with new buildings constructed to meet improved local and state codes, which is already happening.
Energy specialists also note that past government shifts in policy, including stiffer efficiency standards for automobiles and appliances, have spurred innovation. Renewable mandates in states like California have not made a large impact yet on consumer costs, energy specialists say.
“States that intelligently capture this opportunity will cut their citizens’ electric bills, and build a larger number of new clean energy companies,” said Hal Harvey, chief executive for Energy Innovation, a consulting firm.
Business leaders said they would need time to read the fine print of the long E.P.A. draft, and they noted that there were sure to be years of lawsuits and negotiations between the federal government and states over compliance. But even before the draft was released and details began to emerge, many energy executives said they could live with a federal reset of carbon policy.
“At the end of the day, this is a call to open arms for natural gas and a big X against coal,” said Chris Faulkner, chief executive of Breitling Energy, a Texas-based oil and natural gas exploration and production company with 22 percent of its production currently in gas.
Mr. Faulkner predicted that more gas generation plants would be needed to displace coal and meet new demand from population growth and that gas prices would rise perhaps as much as 25 percent. Gas prices have already risen over the last two years, but from historically depressed levels after the extraordinary boom in shale gas drilling that began around 2006.
A rebound in prices, Mr. Faulkner and other oil and gas executives say, probably will spur more drilling in several shale gas fields that are now nearly moribund. It will also accelerate the construction of gathering pipes in North Dakota and South Texas to collect excess gas from oil fields that is now being flared. More drilling should keep gas prices from spiking, they say.
“It’s clear the increased use of natural gas in the existing power sector could create the opportunity for the U.S. to further capitalize on abundant North American natural gas supplies, furthering an energy renaissance, " said Marvin Odum, Shell Oil’s president, in a statement.
The proposed rule also opens the door for nuclear power plant operators to collect extra revenue because their reactors do not generate carbon dioxide. The nuclear industry has long promoted its carbon-free nature, but thus far has not been able to collect cash for that attribute.
The rule lists the six reactors whose retirements have been announced since 2012, and takes note of estimates that an additional 5,700 megawatts — five or six reactors, depending on size, and about 6 percent of total nuclear capacity in this country — are threatened with retirement because of cheap natural gas.
Susan F. Tierney, an energy consultant and former assistant secretary of energy, said, “We know from analysis that if those plants were to retire, the cost to replace them with new generating capacity will be higher than to continue to obtain their zero-carbon output.” She characterized the idea of paying extra for zero-carbon energy as “very light-handed.”
Before the new regulations were released, Frank Prager, vice president for policy and strategy at Xcel Energy, a major Minneapolis-based electric company that operates across the Midwest and Rocky Mountain states, said the key to a successful plan was to give the states and utilities maximum flexibility to meet the goals, allow them time and offer them credit for past improvements. The E.P.A. plan does all three.
He noted that his company, which depends on coal for 46 percent of its power, had reduced emissions by 19 percent since 2005 and was on track to reduce its emissions by 31 percent by 2020. The company has already retired two coal plants in recent years and is retiring two more in the Denver area, replacing them with a combination of natural gas, wind and customer efficiency improvements. But he also noted that Xcel had reduced emissions in Colorado while building a new 750-megawatt coal unit in Pueblo.
“We think you can see significant reductions and still have coal in our system,” Mr. Prager said. “Coal will be part of the mix for us in the future. It’s really important from our perspective to have a balanced energy portfolio.”
Despite the new rules, coal executives said they still saw a future even while older coal-fired plants are shutting down because of changing state regulations and because of rules that were already in place limiting mercury and air toxins.
Jim Orchard, Cloud Peak Energy’s senior vice president for marketing and government affairs, said that last winter underscored the nation’s reliance on coal, especially during periods of peak demand.
“At the end of the day the E.P.A. have their own priorities they need to meet,” Mr. Orchard said before the release of the regulations, “but as well-informed folks they understand the need for the coal fleet to continue to run, or at least a substantial portion of it.”
While acknowledging that the “coal fleet is in a bit of flux at the moment,” he was confident in Cloud Peak’s business of mining and selling coal from the Powder River basin region of Wyoming and Montana, where coal is economically mined and has a lower sulfur content than in other regions. He predicted that while there would a smaller number of coal-fired power plants in the future, some existing plants would potentially burn more coal to meet electricity demands.
That could mean more sales for Powder River basin and Illinois basin coal, while older mines in West Virginia and Kentucky may suffer because of higher operating and transportation costs.
“We are pretty happy with our place,” Mr. Orchard said.
Matthew L. Wald contributed reporting.
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