Navigant Research Blog

Finally, Germany Makes Progress on Coal

— November 2, 2014

For critics who scoff that Europe’s carbon emission reduction goals are unachievable, Germany has become Exhibit No. 1.  Since Chancellor Angela Merkel decreed in the wake of the Fukushima Daiichi nuclear accident that Germany would phase out its nuclear power industry, coal use in Germany has been on the rise, and the country’s carbon emissions have remained stubbornly high.

Now it appears that tide may be turning.  According to AG Energiebilanzen (“Working Group on Energy Balances”), an energy research firm, total energy consumption in Germany is projected to fall by 5% in 2014, compared to 2013, to the lowest level since the fall of the Berlin Wall.  Coal consumption for the year is expected to be down more than 9%.

Those declines are due mostly to the mild winter in 2013-2014, but clean energy is expanding as well: Renewable energy use grew by 1.6% over the first 9 months of 2014, compared to the previous year.

The Brown Stuff

Germany’s coal use carries particular importance not only because it is Europe’s biggest economy, but also because Germany burns mostly lignite or “brown coal,” the dirtiest form of coal, and because Germany’s green energy program, known as the Energiewende, is among the most ambitious in the world.  While renewable energy production has expanded rapidly in Germany – accounting, at times, for 100% of the country’s power demand and forcing utilities to pay customers to consume electricity from conventional power plants – the nuclear phase-out has led to a rise in the burning of coal for baseload power supply.

Now, the government is at least considering shutting down coal plants.  German minister Rainer Baake of the Green Party told reporters in late October that the government could come up with a plan as early as December to eliminate coal-fired capacity and boost energy efficiency programs.  Earlier Der Spiegel reported that the government wants to eliminate as much as 10 GW of coal capacity.  A decision will likely not come until next year.

Please Exit

Getting rid of coal is critical if Germany is to reach its target of cutting greenhouse gas emissions 40% compared to 1990 levels by 2020.  The environment ministry has said that if current trends continue, the country will fall short of that goal by 5 to 8 percentage points.

Meanwhile Swedish energy giant Vattenfall, one of Europe’s largest operators of power plants, said it will seek to sell off its coal-fired plants in Germany.  Vattenfall’s coal operations in Germany produce some 60 million tons of carbon dioxide (CO2) a year – more than Sweden’s total CO2 emissions.

Like a drunk uncle at a wedding, Germany’s coal industry is an embarrassing and unwelcome guest that everyone would like to usher to the exit.  Getting it out the door, though, remains a tough task.

 

As Rail Congestion Crimps Coal Supplies, Calls for Expansion Grow Louder

— October 27, 2014

Even as power plant operators are warning of coal supply shortages come winter, the U.S. government has predicted that congestion on the nation’s railways is likely to get much worse in coming years.

Increased freight traffic traveling by rail – particularly crude oil from the Great Plains and grain from a bumper crop this year – has led to significant bottlenecks across the railway network, the Government Accountability Office (GAO) said in a report issued in September.  Rail traffic has reached the levels last seen in 2007, before the global recession, and “recent trends in freight flows, if they continue as expected, may exacerbate congestion issues in communities, particularly along certain corridors,” the GAO concluded.

Sounding a more dire warning, Hunter Harrison, the CEO of Canadian Pacific, said during a recent analyst briefing that the entire North American railway system is headed toward a cliff.  “We’re quickly approaching a time where none of this works,” Harrison said, according to The Financial Times.  “We cannot continue to go down the road that we’re going down and be successful and not have gridlock beyond anything we’ve experienced before.”

On to Chicago, Slowly

Like a slow train spotted in the distance, this fall’s tie-up of train traffic has been anticipated for years.  The domestic oil & gas boom, centered in the Bakken formation in North Dakota, has had ripple effects across the upper Midwest, the Rocky Mountains, and the Pacific Northwest.  Chicago, where all seven of the Class I railroad companies have major yards, is one of the biggest bottlenecks.  Rail transport is relatively low-cost and emits less CO2 than shipping by plane or truck, but investment in rail infrastructure has been slow.  Producers and consumers of coal, in particular, have traditionally been trapped in exclusive contracts that give them little leverage in negotiations with rail providers.  In September, Democratic Senator Jay Rockefeller of West Virginia introduced the Surface Transportation Board Reauthorization Act, which would increase the authority of the Surface Transportation Board, which regulates railroads, to force them to remedy service delays and justify rate hikes.  Lawmakers chided rail executives at a September 10 hearing in Washington for their failure to anticipate and keep up with increased demands on the railway system.

The problem is especially acute for mines in Wyoming’s Powder River Basin trying to ship coal to customers.  Big coal-burning utilities have already begun running coal plants at below capacity in order to conserve coal stocks.

Ship Gas, Not Coal

Some of this alarm is likely overstated; no one has suggested that coal plants are actually in danger of running out of fuel this winter.  And despite the transport constriction, the price of Powder River Basin coal remains stubbornly low; the price of a ton has dropped 8%, to $10.80, according to Bloomberg.  As a matter of national policy, it makes sense to reduce shipments of dirty coal by diesel-burning trains to supply aging power plants that are quickly becoming uneconomical anyway.  Meanwhile, tight coal supplies will inevitably lead to louder calls for other types of energy transport infrastructure: namely, natural gas pipelines.

There are good reasons to invest in expanding the nation’s railway infrastructure; shipping more coal is probably not one of them.

 

Winners and Losers under the U.S. EPA’s Clean Power Plan

— September 5, 2014

The most cost-effective and accessible way for states to replace retiring coal plants and comply with the U.S. EPA’s proposed carbon regulation (the Clean Power Plan, or CPP, released in June 2014) is through demand-side measures.  These include the energy efficiency programs that the EPA uses to calculate emissions rate targets in the CPP as well as other measures, such as demand response.  Analysis by Navigant and others shows that measures that cut demand growth will cut compliance costs.  However, most states cannot meet their targets by energy efficiency alone.

It’s in electricity customers’ best interest for states and utilities to implement the CPP with as much emphasis on energy efficiency and demand response as they are physically and financially able to.  For this primary reason, states and utilities will expand programs where they already exist and introduce new programs where there are gaps.

Accelerating Retirements

The costs to comply with the CPP, in addition to costs to comply with other environmental regulations as well as competition with low-cost natural gas, will drive approximately 45 GW of additional coal retirements by 2025, beyond anticipated retirements without the CPP (according to Navigant’s analysis).  The aging U.S. coal fleet already faces troubled times, with low natural gas prices expected to continue and the Mercury and Air Toxics Standards (MATS) requiring hundreds of coal plants to install costly emissions controls or shut down.  As coal plant owners look ahead to a carbon-constrained future, they are weighing complex decisions about whether it makes sense to invest in improvements in the near term when the long-term future of their coal fleets is uncertain.  Much depends on what the EPA’s final regulation will look like and how states will choose to implement it.

While the discussion around coal retirements tends to center on replacement by natural gas, wind and solar will also play a role.  The CPP will drive solar and wind generation above and beyond existing renewable targets, even in states that do not currently have a Renewable Portfolio Standard.  Growth will be particularly strong in areas that have high potential for solar and wind, such as the Desert Southwest and the Texas Panhandle, and where higher power prices make renewables more cost-effective.  Although much of the new solar capacity will be distributed customer-scale generation, wind installations will continue to be larger, utility-scale deployments.

New Questions Raised

The power sector has been expecting federal-level climate change policy or regulations for years.  This has been a major area of uncertainty for future generation planning.  However, the release of the proposed CPP has not led to any concrete assumptions for the future, and it has likely generated more uncertainty than it has quelled.  How will the EPA fashion its final regulation?  Will states choose to band together to implement the regulation, and will the basis for their implementation be rate-based or mass-based targets?  How will energy efficiency be measured and verified?  How will differences between states be reconciled in a system where electricity is constantly moving across state lines?  The answers to these questions will drive broad changes in the power sector and have ripple effects across the national economy.  These ripples will be felt by all industry players that are electricity customers (i.e., everyone) and, indirectly, by the healthcare industry (handling fewer conditions brought on by poor air quality) and the insurance industry (facing lessened impacts of climate change).

It’s not surprising that the CPP will transform the domestic power generation landscape, reducing coal use, lowering demand growth (due to energy efficiency and conservation programs), and increasing gas-fired and renewable generation.  Thinking globally, the plan could be just what the international community has been calling for: leadership on climate change from the United States that will push other nations (notably China and India) to follow suit.

 

Ohio’s Freeze on Renewable Mandates Encourages Clean Energy Foes

— June 20, 2014

In an ominous first for renewable energy policy, Ohio Governor John Kasich signed a bill that freezes Ohio’s Alternative Energy Portfolio Standard (AEPS) and energy efficiency measures for 2 years.  The AEPS has been in place since 2008 and called for all investor-owned utilities to source 25% of their electricity from alternative sources, including 12.5% from renewables, by 2025.  These policies, which are more generally called renewable portfolio standards (RPSs), have been enacted in 29 states and Washington, D.C. and play a key role in driving demand for renewable energy.

Any policy that detracts from the status quo-entrenched fossil fuel interests is an attractive target.  RPS laws have been under sustained attack over the past few years, with no fewer than 15 attempts to scrap them at the state level.  The popularity and dropping cost of renewables have helped fend off these attacks, but this result in Ohio reflects the first time that opponents of renewables have succeeded in rolling back an RPS.  Enactment of the 2-year freeze is likely to be followed by a readjustment of the requirement downward, or the scrapping of it altogether.

There were some localized issues that propelled the attack.  A new generation of wind turbines optimized for lower wind speeds has allowed the expansion of wind energy from its traditional home in the more sparsely populated heartland to the more densely populated eastern Midwest markets like Ohio.  This led to increasing NIMBY (not in my backyard) and BANANA (build absolutely nothing anywhere near anyone) opposition.

Domino Effect?

Entrenched fossil fuel interests worried about competition fanned these flames.  And to be sure, the accompanying energy efficiency measures appeared to be a legitimate problem for large industrial users who were not given credit for improvements in process efficiency.  The energy efficiency issues, in fact, may have provided the most momentum behind the RPS attack.

But beyond the state-specific critiques, opposition to renewables comes from fossil fuel interests and conservatives who oppose any government support for alternative energy.  The Energy & Policy Institute has illuminated an increasingly orchestrated nationwide effort that includes the American Legislative Exchange Council (ALEC), with financial backing from the Koch brothers.  ALEC was reportedly active in helping gain support among state lawmakers in Ohio for pushing back against the renewable energy mandates.

Emboldened by victory in Ohio, attacks on state RPSs are likely to increase.   It will be hard to slow the clean energy momentum, though.  Renewables deployments have grown so fast in the United States (and globally) that analysis by Navigant Consulting director Bruce Hamilton shows that around 15 states with RPS mandates, or RPS goals, have already achieved 100% compliance in recent years and another 8 are at 75% to 99%.

Government support remains essential for the future of renewable energy in the United States – but the thousands of wind turbines and solar panels installed in recent years provide a strong foundation of fuel-free energy resources, and today’s increasingly popular and cost-competitive renewables will drive continued deployment whether politicians demand it or not.

 

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