No Coal, No Nukes, No Problem?

While the call for reduced dependence on coal-fired power plants and nuclear reactors to fuel the U.S. electricity grid is not a new concept, it is one that continues to grow louder. Renewable energy is the alternative generation source preferred by many, but non-hydro renewables made up less than five percent of the fuel mix in 2010, despite net generation from renewable sources more than doubling over the last decade. Meanwhile, natural gas-fired generation has demonstrated significant gains since the turn of the century, to the point that it currently accounts for nearly 25 percent of all power produced in the U.S. Although natural gas would be the easiest and lowest-cost replacement fuel, it is important to consider the potential risks and ramifications of a shift to gas should an escalation of coal and nuclear retirements occur.

Coal remains the largest source of U.S. power generation by a wide margin. Approximately 45 percent of the nation's electricity was fueled by coal last year, and while that is down from 51 percent in 2001, net generation from coal is still almost twice as much as from any other source. At the current rate of consumption, each percentage point of coal that is reduced from the fuel mix equates to more than 40 million megawatt hours of generation that has to come from another source. Given the general trend higher in U.S. demand for electricity -- retail sales were up more than 10 percent from 2001 to 2010 -- the impact of reduced coal-fired generation on other fuel sources is likely to be magnified even further in the coming years.

In the quest to reduce CO2 emissions, a potential rebirth in nuclear generation had until recently been gaining momentum. During his January 25, 2011 State of the Union address, President Barack Obama included nuclear among the non-renewable but low-carbon energy sources that would allow for compliance with a proposed federal clean energy standard by 2035. However, following the nuclear disaster in Fukushima, Japan in March, much of the social goodwill and acceptance of nuclear power that developed in the U.S. over the last 10 years was lost. The central Virginia earthquake in August further highlighted the issue of U.S. nuclear safety, as tremors forced the temporarily shutdown of reactors at the North Anna power station. Instead of growing nuclear generation from its current 20 percent of the grid, it is more likely now that the retirement of a portion of the existing nuclear fleet will be escalated.

If reliance on coal and nuclear generation is to be reduced, the most realistic replacement option is natural gas. It has a proven track record for growth and market dynamics are currently very attractive, in that prices are relatively inexpensive and supplies are plentiful. Both of those factors are owed largely to a renaissance in domestic natural gas production in recent years. Improved technology that allows for the extraction of gas from shale formations has been a game changer for the U.S. natural gas market, leading to successive annual records for domestic production in 2008, 2009, and 2010. In the wake of this supply-advantaged environment, natural gas prices in recent years have declined considerably from the levels of 2004 through 2008. Still, those looking for an alternative to coal and nuclear should be careful in labeling gas a panacea for the country's generation needs.

Against the backdrop of record production and a sub-$4.00 market, it is easy to forget that natural gas has historically been among the most volatile commodity prices. Just three years ago, prompt-month gas futures on the New York Mercantile Exchange traded to almost $14 per MMBtu. Not too long before that, conventional wisdom ahead of the shale boom was that natural gas supplies were drying up. If a measurable portion of the combined 65 percent contribution that coal and nuclear make to the generation mix is shifted to natural gas, it is not that difficult to imagine a return to higher pricing, in conjunction with a potential supply squeeze.

Consideration should also be given to the increased scrutiny of the use of hydraulic fracturing ("fracking") in natural gas production. Concerns over the safety of fracking operations and the environmental impact of the practice could lead to further regulation of the drilling industry. A change to production economics and/or restrictions on the use of hydraulic fracturing in the future would impact the availability of natural gas supply to the U.S. market, limiting the potential of gas as a replacement generation source for electricity.

Reduced dependence on coal and nuclear facilities in the U.S. is likely to remain a topic of political and social conversation in the foreseeable future. In considering alternative sources for power generation -- renewable or otherwise -- potential cost and reliability concerns should be explored as well, and should be just as hotly debated.