Coal isn’t being outcompeted

For most of U.S. history, coal has been our go-to source of electricity thanks to its abundance and affordability.

And as the result of improved technology, modern coal is incredibly safe : for example, since 1980 Sulfur Dioxide levels in the U.S. have been reduced by 87% and since 2000 the levels of particulate matter smaller than 2.5 micrometers have decrease 42%. No demonstrable harm to human health has been established for concentrations at today’s levels.[1]

But in recent years, coal experienced a steep and sudden decline, with coal production falling by 27 percent between 2011 and 2016, tens of thousands of coal workers losing their jobs, and the EIA projecting that U.S. coal demand will remain depressed indefinitely.[2]

Critics say we have been moving away from coal because it is no longer competitive with natural gas and renewables as a source of affordable electricity. As Vox puts it : “The industry’s product is outmoded. Natural gas and wind power are cheaper than coal power in most places, and solar power is heading the same direction.”[3]

We believe deeply in competition and if an industry can’t win over consumers by offering the best product, then it should fail. But claiming that coal is getting outcompeted by cheaper alternatives ignores one vital fact: coal hasn’t been free to compete .

The United States v. Coal

We believe that communities should choose the energy sources that they judge are the best combination of reliable, affordable, and safe. But for decades, the federal government has dictated safety standards for local communities and encouraged the use of unreliable, unaffordable energy sources. Both policies have put coal at an unfair disadvantage.

New Source Review (NSR), for example, was established by the federal government in 1977 as part of the Clean Air Act. It mandates that in areas with high air quality, any new or significantly modified facility, such as a coal plant, has to use the “best available,” i.e., most expensive anti-pollution technology instead of the most cost-effective technology. In areas with lower air quality NSR is even more onerous: its “cap and trade” policy requires companies to achieve the “lowest achievable emissions rate”—and to offset those emissions by paying other nearby sources to reduce their emissions.[4]

These restrictions often made it cost prohibitive to build new coal plants or upgrade existing plants to make them cleaner and more efficient—even in areas with extremely high air quality.

The result? According to the EIA , “Most coal-fired capacity (88%) was built between 1950 and 1990, and the capacity-weighted average age of operating coal facilities is 39 years.”[5]

At the same time that coal faced mounting restrictions, coal competitors gained unfair advantages. Solar and wind power, in particular, have received lavish subsidies and even outright mandates for more than forty years.

Federal encouragement of solar and wind started with the 1978 National Energy Act, and increased throughout the late 20th and early 21st century. The 2005 Energy Policy Act, for example, passed under George W. Bush, included renewable tax credits and established “net metering”—a subsidy that allows homes to sell solar power back to the grid for inflated prices.

The states, too, have thrown their weight behind wind and solar—especially through state Renewable Portfolio Standards (RPS), which require utilities to use favored energy sources like wind and solar even if they aren’t economical. According to research from the Lawrence Berkeley National Laboratory, “Roughly half of all growth in U.S. renewable electricity (RE) generation and capacity since 2000 is associated with state RPS requirements.”[6]

One of the beneficiaries of wind and solar favoritism has been the natural gas industry. To cope with the unpredictable, intermittent power provided by wind and solar, grids need to depend on a source of reliable power that’s able to ramp up and down quickly. This works to the advantage of natural gas since it is much better at coping with stop-and-go power than a coal plant, which takes up to eight hours to reach full output once it’s turned on.

During the Obama administration anti-coal policies became even more draconian. Obama famously said during his first presidential campaign that he advocated a “cap and trade” system for CO2 that would “ bankrupt ” anyone who built a coal plant.[7] That was followed in 2009 by the EPA’s Endangerment Finding, which held that greenhouse gases were to be regulated as a pollutant. All of this signaled to utilities and government planners that onerous restrictions on coal would soon follow.

They did . Two Obama era regulations were particularly harmful to coal: the 2011 Mercury and Air Toxic Standards (MATS) and the 2014 Clean Power Plan (CPP).[8]

MATS placed stricter standards on mercury and other emissions, which had already been declining from 1990s levels. According to one analysis , MATS was responsible for shutting down nearly 20 GW of coal capacity.[9] Other studies have reached similar conclusions, with the Brattle Group finding that MATS is the “[s]ingle‐most important environmental regulation driving the expected coal plant retirements in the U.S.”[10]

The Clean Power Plan, although never implemented, would have required states to reduce their power plants’ CO2 emissions by 32% by 2030 relative to 2005 levels, forcing communities to prematurely shut down coal power plants and replace them with natural gas and renewables. The EIA estimated that the CPP would have been responsible for the retirement of 50 GW in coal capacity by 2040.[11]

What’s important to keep in mind is that policies like these don’t simply have a direct impact on the competitiveness of coal—they also shape expectations about future policies .

If the government passes laws that favor solar and wind and harm coal, it’s a good bet that they’ll do even more to support solar and wind and harm coal in the future. That matters because when utilities decide what sources of energy to invest in, say by building a new power plant, they are trying predict whether their investment will pay off decades in the future.

Imagine, for example, you were trying to decide whether to invest in a dairy farm or wheat farm, and you saw that veganism was becoming popular among elites, with leading members of Congress calling for America to go “Beyond Beef,” and vowing to pass “carnivore taxes” and increase produce subsidies.

Even if your customers preferred animal products, chances are you would decide that investing in a dairy farm that might be taxed and regulated out of existence in a decade made no sense.

But if that happened, would anybody say that dairy got outcompeted by vegetables? Or would they say that dairy got outlawed?

Instead of being free to compete on a level playing field, coal has been forced to overcome discrimination and solar and wind favoritism.

Why coal is losing ground to natural gas

It would be wrong to blame all of coal’s decline on anti-coal policies. There is no doubt that the amazing innovations that unleashed the shale revolution have made natural gas far more competitive with coal.

That is the kind of competition we welcome because it means more energy abundance for Americans and for billions around the world.

But the fact is that coal hasn’t been free to compete—and that is the major reason it is losing ground to natural gas.

Even with all the restrictions on coal and all of the achievements of shale energy, many analyses suggest that coal remains competitive with natural gas a source of affordable electricity.

Let’s start with the big picture: one thing we know for certain is that the states that use coal the most have the lowest electricity prices in the U.S. while the states that use coal the least have the highest prices. (Idaho is an exception thanks to its cheap hydroelectric power.)[12]

Comparison of Electricity Costs for States in the Contiguous U.S. Using the Highest and Lowest Fractions of Coal-based Electricity

Source: National Coal Council[13]

Studies that try to directly compare the costs of different energy sources can be helpful but are fraught with difficulties, which is why different analyses can reach very different conclusions. Even so it’s instructive to look at what some of these studies do say.

For example , a study by the pro-coal non-profit American Coalition for Clean Coal Electricity found that existing coal plants are on average more affordable than new natural gas plants, as measured by the levelized cost of energy. The study also found that while existing coal plants are slightly more expensive today than existing natural gas plants, that is likely to change by 2025 based on projected natural gas prices.[14]

As the ACCCE study notes, its cost estimates are in line with other studies.

As with all studies, this one is open to challenge. What’s not in dispute is that the difference in cost between coal and natural gas power is, on average, extremely small. But it wasn’t always.

What’s striking is that coal actually began stagnating and losing ground to natural gas in the 1990s .[15] That was long before the shale revolution made gas economically competitive with coal—and it was well after coal’s ability to compete was shackled.

Share of Total Fossil Fuel Generation (All Sectors)

Source: U.S. Energy Information Administration[16]

It turns out that natural gas capacity increased virtually without interruptions since at least 1990, growing faster from 2000-2010 (85%) than from 2006-2016 (15%). Given that the shale revolution only began around 2008 and was not on people’s radar for several more years, it is hard to attribute those trends to competitive forces rather than growing long-term concerns over the path of energy policy.

In fact, there is strong evidence to implicate policy in coal’s decline. A 2013 study from Duke University, for example, found that “the economic viability of 9 percent of current coal capacity is challenged by low natural gas prices, while another 56 percent would be challenged by the stricter emission regulations.”[17]

A more recent study by Columbia University’s Center on Global Energy Policy tried to minimize the impact of anti-coal policies, suggesting that they “are directly responsible for a roughly 3.5 percent decline in U.S. coal production.”[18] That study, however, looked only at anti-coal policies passed during the Obama administration—not the longer-term favoritism of gas and renewables, or the harder to quantify regulatory uncertainty created by such policies. And it accepted at face value EPA estimates of the costs of these policies: estimates by the very organization seeking to implement Obama’s anti-coal policies.

On the other hand, power plant owners of retired coal units have attributed closures to EPA policies and regulations in about 3/4 of cases .[19]

To make matters worse, utilities have an incentive to prematurely close existing coal plants and replace them with expensive new natural gas plants: in most places, the more utilities spend on capital projects, the more regulators allow them to charge their customers (a problem known as “ gold-plating ”).[20] And since utilities are able to pass on fuel costs to users, they are largely indifferent to the whether natural gas is genuinely more affordable than coal.

The bottom line is that despite decades of unfair restrictions on coal and unfair advantages for alternatives, coal remains affordable: that’s why we’re confident that in a truly fair competition, coal would flourish.

Wind and solar can’t compete with coal

If natural gas owes its success to a mixture of genuine competitive achievements and anti-competitive government policies, the “success” of wind and solar power has been virtually 100% the result of government favoritism.

The case that wind and solar are outcompeting coal is based on the observation that their costs have been declining rapidly compared to coal. But equating the price of wind and solar power with the price of coal power is misleading. Wind and solar can’t provide reliable energy : comparing the cost of their power to coal is like comparing the productivity of a reliable employee to the productivity of an employee who shows up at work at unpredictable times.

What we care about is the total cost of supplying people with reliable energy—and adding unreliable energy to the grid imposes huge costs that aren’t reflected in triumphant statistics allegedly showing affordable wind and solar.

Experience from Germany, Denmark and other wind and solar leaders shows that coping with the intermittent production of wind and solar makes the power system incredibly expensive. Denmark , for instance, is the world leader in wind generation.[21] Its growing dependence on wind has contributed to a 100% increase in electricity prices for Danish households, which now face the highest electricity prices in the developed world—3 to 4 times U.S. prices.

The challenges and expense involved in harnessing unreliable power explain why solar and wind require mandates and subsidies even to achieve their tiny 7.6% share of U.S. electricity generation.[22] According to an analysis of a 2015 EIA report by the Institute for Energy Research, wind received almost $6 billion in fiscal year 2013 from the government, solar over $4 billion (including tax breaks).[23]

Per unit of energy produced, solar received over 400 times the subsidies of coal . Wind received almost 70 times the subsidies as coal . And that does not factor in the favorable regulatory environment for solar and wind noted above.

In a truly fair competition, wind and solar would not only be unable to compete with coal, it is questionable whether they would have any meaningful market share at all.

Conclusion

We believe that coal isn’t declining in the U.S. primarily because it’s being outcompeted—but because it’s being outlawed.

The key to maximizing affordable, reliable, safe energy is allowing communities to choose the best forms of energy and for different energy companies to compete—including coal. Government policies that favor some technologies and limit or ban others force people to pay higher prices for inferior energy sources, suppressing current prosperity and future innovation.

To restore genuine competition, local air quality and pollution issues should be dealt with by state and local governments rather than through one-size-fits-all federal standards like New Source Review and MATS. And policies based on energy favoritism, like Renewable Portfolio Standards and other subsidies for wind and solar, should be eliminated altogether.

This will allow coal and all energy sources to compete on a level playing field. If our critics are right that coal is “outmoded,” then they have nothing to fear: coal will lose out to natural gas and other alternatives. But if they’re wrong, their anti-coal policies are robbing millions of the affordable, reliable energy they need to flourish.