The shift from coal to natural gas: What is the impact?

Ohio, like many Midwestern states, is facing the prospect of the retirement of a significant number of coal-fired electric generation plants in 2015, primarily due to the U.S. EPA’s Mercury and Air Toxics Standard (MATS) rule.

Ohio expects to see more than 6,000 MW of coal-fired generation retired this year. Across the United States, the projected total of retirements exceeds 41,000 MW. No matter how you assess it, those retirements will have a major impact on power in the United States.

What do these retirements mean for Ohio? First, it means the shift in generation resource mix will change dramatically in the coming years. Ohio historically runs at 80% coal fired generation for power. There is certain to be an increase in natural gas fired units – both in the increased capacity factors of existing units and the construction of new gas fired units.

Good news for Ohio

Ohio is well situated not only to survive but to thrive in this transitional period. The existing and developing natural gas pipeline infrastructure provides excellent access to the robust natural gas supply needed to fire the natural gas units. Ohio is also adjacent to the now well-developed Marcellus play in Pennsylvania and sitting atop its own resources in the Utica shale, which is still early in its development. The much needed midstream infrastructure (as opposed to interstate pipelines) is under construction and delivery is getting easier with each passing month.

Good news for power generators

Ohio’s proximity to the vast supply of natural gas means generators benefit from a very low cost supply. In fact, the most recent review of Marcellus Hub pricing against and Henry Hub pricing reflects a significant local discount. The United States Energy Information Agency (EIA) cut its winter 2015 forecast to $3.44/MCF. However, spot prices for Marcellus gas have recently dropped below $2/MCF, creating a negative basis against Henry Hub pricing. The fact that many Marcellus (and Utica) wells are shut in waiting for midstream pipeline capacity to move the gas means the huge local supplies should be available for years to come, and that’s good news for power generators.

Good news for consumers

While there are critics of the PJM model that argue it does not provide adequate price signals for construction of new generation, the reality is that new generation is being constructed. In Ohio alone, more than 4,000 MW of new natural gas fired generation either has been applied for or has received certificates to construct from the Ohio Power Siting Board and approval from PJM to interconnect. The first of these new generators is already under construction, and much of the new generation is expected to be online in the next 2-3 years. These new plants are all merchant plants, meaning that the incumbent utilities are not constructing them, but that wholesale power generators exposed to the market are. In practice, the evidence demonstrates that the PJM market is incentivizing new plant construction. The outcome for the consumer is that despite significant retirements, sufficient power supplies will be in place to ensure system reliability.

The world of power generation is changing. Where it makes economic sense, new market entrants are stepping up to ensure adequate supply and reliability are maintained. Ohio’s restructured market is finally achieving what the Ohio General Assembly envisioned 15 years ago – more competition, new suppliers putting private money at risk, and consumers having choices in where and how they spend their monthly utility dollars. The task of educating consumers about their choices is crucial and is already underway.