Natural Gas Eclipsing Coal as Fossil Fuel of Choice for Electricity Generation

Lower natural gas prices and stricter environmental regulations are coalescing to make natural gas the fossil fuel of choice for electricity generation, over other fossil fuel alternatives such as coal and oil.  The U.S. Energy Information Administration ("EIA") recently reported that "[a]mid historically low natural gas prices and the warmest March ever recorded in much of the United States, coal's share of total net generation dropped to 34% -- the lowest level since at least January 1973 (the earliest date for which EIA has monthly statistics).  Despite seasonally low loads, natural gas-fired generation grew markedly and accounted for 30% of overall net generation by March 2012." 

EIA projects that "[c]oal consumption by the U.S. electric power sector in 2012 is expected to fall below 900 million short tons for the first time since 1996 as the electric industry increased its use of natural gas for power generation. . . . Coal demand by the power sector is projected to decline by nearly 5% this year to about 884 million short tons, the lowest level since 1995.  The decline in coal consumption reflects, in part, the continued switch by the electric industry to natural gas.  Power sector demand for natural gas is expected to grow by almost 9% this year to a record high of 22.7 billion cubic feet per day." 

Low Prices Drive Rise in Natural Gas

Increasing supply and decreasing price of natural gas are the primary drivers of its dominance in the marketplace.  "While indications were already apparent in 2009 and 2010, by mid-2012 there have been countless reports issued on the relatively attractive outlook for unconventional gas reserves, for domestic production levels for natural gas, and for natural gas prices at present and in the future," wrote Susan F. Tierney, Ph.D. of Analysis Group, Inc. in a recent report.  

Dr. Tierney predicts that those market conditions will continue for the foreseeable future:  "Current spot-market prices for natural gas are the lowest they have been in a decade, and the prices of forward gas contracts remain low for many years in the future. . . .  EIA's Early Release 2012 Annual Energy Outlook estimates that average annual wellhead prices for natural gas will remain below $5 per mcf (2010 dollars) through 2023." 

Natural Gas Buoyed by Environmental Benefits

Natural gas has also been buoyed by environmental benefits relative to coal generation and new federal environmental regulations.  Natural gas produces fewer particulate air emissions as well as lower greenhouse gas emissions than coal.  The electric power industry is facing the challenge of complying with new more stringent regulations from the Environmental Protection Agency that require the reduction of toxic emissions from power plants, including mercury.  The industry is also facing uncertainty regarding future greenhouse gas emission limits or other carbon constraints.

The Associated Press reports "[U]tilities are aggressively ditching coal in favor of natural gas, which has become cheaper as supplies grow.  Natural gas has other advantages over coal:  It produces far fewer emissions of toxic chemicals and gases that contribute to climate change, key attributes as tougher environmental rules go into effect."  Jonathan Fahey, "America starts to kick coal to the curb as cleaner alternatives pick up steam," June 13, 2012. 

Major Shifts in Energy Industries

As a result, the electric power industry is cancelling construction of new coal facilities and making economic decisions to retire coal units, while increasing the use of existing gas units and developing new gas units.  This has had widespread reverberations in the coal and natural gas industries.  Coal interests are laying off workers and cutting production while legal disputes are on the rise over coal supply and delivery contracts.  Jonathan Fahey, "America starts to kick coal to the curb as cleaner alternatives pick up steam," June 13, 2012. 

Meanwhile, the past several years has seen a significant increase in natural gas production, largely from shale gas formations.  That production may be leveling off, however, amid increased supply, decreased prices and the faltering economy and consequent diminished energy demand.  The trend toward natural gas-fired electric energy production is unlikely to change as long as current market conditions and regulatory environment prevail.