The nation's energy future will greatly differ from that of today. While many are eager to welcome an era of renewable power, the reality is that fossil fuels are here to stay. There will be a large spike in the percentage of energy output that the United States generates from wind, solar, biomass and other renewable sources, but traditional power plants will remain the major drivers of the grid for decades to come -- if not longer.
But that does not mean change isn't occurring now. Currently, energy companies are trying to navigate a transitioning landscape in which many coal-fired power plants, which supplied 45% of the nations electric power in 2010, are retired in favor of natural gas-fired plants. The trend in power generation has been moving in this direction for both environmental reasons (burning natural gas is cleaner than coal) and financial reasons (vast new deposits and plummeting gas prices could lead to profits in line with those historically earned through coal), but the related regulatory and market risks are arguably the largest facing power-generation companies today.
Regulatory Uncertainty
Environmental regulations remain a great unknown for the industry due to the distant time lines over which they will be phased in and the ongoing legal fights to ensure they never are. The EPA's so-called "endangerment finding" stands front and center. Since 2009, the agency has used this provision to authorize regulating the emission of greenhouse gases, which it says can "reasonably be anticipated to endanger public health or welfare."
Thus far, the EPA has won in court. In June, following a legal challenge from plaintiffs including 15 states, the U.S. Chamber of Commerce and the National Mining Association, the three-judge panel of a District of Columbia appeals court unanimously upheld the watchdog's authority to cap the emissions of any new power plants.
The ruling clears the way for the EPA's proposed "new source performance standards," a regulatory scheme prohibiting the construction of any power plants that emit more than 1,000 pounds of carbon dioxide per megawatt hour of electricity produced.
In effect, these standards virtually ban building any new, traditional coal plants. Coal plants with advanced "carbon-capture" or "gasification" technology would likely be able to operate within these emission restrictions, but adding such processes would mean the plant would be less profitable than the natural gas plants that exist today.
As such, the losing plaintiffs plan to continue fighting. "Today's ruling is a setback for businesses facing damaging regulations from the EPA," wrote Jay Timmons, president and CEO of the National Association of Manufacturers. He added that his organization "is reviewing the court's decision and will consider further legal options on appeal."
Comments by Virginia Attorney General Ken Cuccinelli further guarantee litigation will continue. Referencing a 2007 Supreme Court decision that he believes the D.C. district court misinterpreted with its ruling, he stated that, "because only the Supreme Court can clarify its prior ruling, Virginia intends to petition the Supreme Court to review the case."
The Invisible Hand
Many say regulations are a secondary force pushing power generation from coal to natural gas. Susan Tierney, Ph.D., of the Analysis Group, a Boston-based think tank and consulting firm, believes that market forces are driving the transition from coal to gas more than anything else. In a white paper entitled "Why Coal Plants Retire," she wrote that the trend of coal plant closures predates the current regulatory debate.
"The recent retirement announcements are part of a longer-term trend that has been affecting both existing coal plants and many proposals to build new ones," states the white paper. "The sharp decline in natural gas prices, the rising cost of coal and reduced demand for electricity are all contributing factors in the decisions to retire some of the country's oldest coal-fired generating units. These trends started well before EPA issued its new air pollution rules."
Indeed, the percentage of U.S. electricity generated by natural gas has risen sharply over the past decade. In 2004, for instance, 49.8% of the nation's supply came from coal plants while just 17.9% was generated by gas. In 2011, those numbers changed to 42.2% and 24.8%, respectively, and in April 2012, for the first time, "generation from natural gas-fired plants [was] virtually equal to generation from coal-fired plants," according to the U.S. Department of Energy's Energy Information Administration (EIA). While this will not last, the EIA does project natural gas plants to supply 30.8% of the electricity in 2012, which would be the highest percentage ever.
The main factor for this evolution is obvious: vast domestic gas supplies. President Barack Obama has even called the United States, which produced 21% of the world's supply in 2009, the "Saudi Arabia of natural gas."
Bumpy Road to the Future
This is where market and regulatory realities collide. A main reason for the push towards retiring coal plants and falling gas prices in recent years is the explosion of shale gas into the market. In recent years, the extraction of gas trapped onshore beneath the ground in shale rock has become commercially accessible with the development of horizontal drilling and hydraulic fracturing (better known as "fracking"). The process involves injecting a solution of water, sand and chemicals into the earth to break up the bedrock. This releases the natural gas that has been trapped below for millions of years, which is then collected by energy companies and brought to market.
But the process has spurred backlash for the environmental damage it can cause. The chemicals used can seep into aquifers, contaminating public water supplies and local ecosystems. And even if the well has no spills, leaks or faulty design, the process still creates immense quantities of wastewater.
In New York, these fears have been enough to create a moratorium on fracking, but in other states, the practice has been met with less resistance. And this patchwork approach to regulation is unlikely to change any time soon due to fracking exclusions in both the Clean Water Act and Clean Air Act.
"It would take Congressional action to go in and remove that exemption," said Andrew Byers, associate vice president for Black & Veatch, an engineering and construction company. "These days, given the partisan politics in Congress, it's kind of hard to see much happening on the environmental side unless you get a large majority of one party or the other to make it happen."
Nevertheless, power-generation companies trying to make billion-dollar decisions over the next few years will be faced with the challenge of forecasting the behavior of both federal and state agencies while, at the same time, speculating on the next market fluctuation.
Black & Veatch predicts that natural gas will account for 42% of U.S. electricity generation in 2035 compared to just 23% for coal. While the exact totals may differ, most industry experts expect the rise of gas to continue. For the companies leading the transition, however, the shift will be far from seamless.