Source: Institute for Energy Economics and Financial Analysis
Despite continued attempts by the current federal administration to restore coal production in the United States to its former peak, economic forces driving wholesale electricity markets present a dim reality for coal-fired generation.
S&P Global Market Intelligence projects that coal’s market share will continue to erode in the coming five-year period as a slew of announced retirements take place and the economic picture forces out additional coal plants that are exposed to the market. The increasingly favorable economics of zero-fuel cost renewables have contributed to a continued expansion in the market share of carbon-free generation, while the aging coal fleet continues to retire regardless of political backing. Additionally, natural gas-fired generation continues to claim market share from coal due to increased flexibility in unit dispatch, greater unit efficiency, and a prolonged stretch of low natural gas prices.
Due to these headwinds, S&P Global Market Intelligence estimates that 28 GW of U.S. coal-fired generation will retire in 2019-2023. The Eastern Interconnect accounts for the majority of the retirements, with approximately 11 GW of announced capacity retirements coming offline by 2023 and another 9 GW forecast to retire due to poor economics. More than half of the anticipated retirements located in the East are within PJM. Approximately 8 GW of coal-fired generation is also expected to retire in the Western Interconnect.
As a result of these retirements, conservative estimates suggest that demand for thermal coal will fall by more than 150 million tons over the coming five-year period. It is likely that coal pricing will be heavily exposed to the downside during this time while coal production struggles to ratchet down at the same pace as the contraction within the sector. Falling global coal prices will hinder the export markets from offering much of a reprieve as the outlook there also looks bleak. There is little chance of a recovery on the demand side of the equation, with 85 anticipated retirements of coal units in the next five years.
Analysts have cited lower expected electricity demand this summer as a possible drag on coal volumes. Added to the prospect of lower electricity demand is a continued surplus of natural gas supply out of the Permian and Marcellus regions, which have depressed spot and forward prices. Henry Hub futures currently trade at $2.40/MMBtu for the balance of 2019, with much of the Midwest, West and Texas trading at discounts ranging from $0.15-$1.15/MMBtu. If these price levels should persist through the summer, significant additional volumes of coal could be displaced in the second half of 2019.
The S&P Global Market Intelligence coal forecast currently projects a 91 million ton decline in power sector consumption from 2019-2020. Coal displacement at current price levels could bring half of this decline forward into 2019, pushing forecast power coal consumption for 2019 down to approximately 515 million tons, or 116 million tons lower than 2018.