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Coal, CO2 emission declines caused by pandemic could persist: Moody’s

The slowdown in economic output and industrial activity as a result of efforts to slow the spread of COVID-19 is expected to reduce carbon dioxide (CO2) emission levels and accelerate the decline of coal fired generation, according to a report from Moody’s Investors Service.

And, even as states begin to slowly reopen, the impact of the pandemic on power demand and carbon emissions will continue through the remainder of the year and likely into 2021, the report, “Coronavirus-related power demand reductions drive lower carbon emissions,” said.

Moody’s expects CO2 emissions to drop by 175 million metric tons compared with 2019 levels, to end the year at 320 million metric tons. In its base case scenario, Moody’s estimates US CO2 emissions will be 11% below 2019 levels by 2022, following a year-over-year decline of 14% in 2020. The base case scenario includes a 6% average generation decline across all customer classes in 2020, followed by two years of moderate recovery with 3% increases in generation in both 2021 and 2022. In that scenario, generation would fully recover to pre-pandemic levels by 2022.

In a milder scenario, Moody’s estimates CO2 emission in 2022 will be 5% lower than in 2019, with a year-over-year decline in 2020 of 10%.

In a more extreme scenario, in which average generation declines by 8% in 2020, with most of the reductions absorbed by coal-fired generation, Moody’s estimates CO2 emissions could drop by 19% in 2020 and remain at those levels going forward.

Moody’s shares the Energy Information Administration’s (EIA) expectation that most of the CO2 reductions will be driven by generation declines from CO2 emitting resources, primarily coal-fired plants, however, the ratings agency does not share the EIA’s forecast of a significant rebound in US coal consumption in 2021.

In 2019, output from the US coal plants fell to its lowest point since 1976 and the power sector has cut coal consumption by more than half since the late 2000s, Moody’s noted.

And while Moody’s base case scenario sees coal-fired generation remaining flat next year, “it is possible that it will continue to decline” under pressure from sustained low natural gas prices, the report said.

In March 2020, Moody’s reduced its medium-term price band for North American natural gas at the Henry Hub to $2.00-$3.00 per million British thermal units (MMBtu) from $2.25- $3.25 per MMBtu. Moody’s projects Henry Hub prices to be at the lower end of that range through 2021.

Low natural gas prices challenge the fundamental economics of coal-fired generation, especially for coal plants in regions near shale plays where natural gas prices are below the Henry Hub price, which could accelerate retirements of out-of-the-money coal-fired power plants, Moody’s noted.

And while all regions to see declines in coal and gas-fired generation, Moody’s expects those declines will vary by region. Fossil-fired generation will likely increase in the New York Independent System Operator region, for instance, because of higher natural gas generation in 2020 and lower year-over-year nuclear generation because of the retirement of the Indian Point nuclear plant.

The Southwest Power Pool (SPP) and the Pacific Northwest, on the other hand, could see large declines in coal-fired generation.

Regions such as Florida, SPP, Pacific Northwest, Southwest and Texas will likely see larger declines in CO2 emissions because declining coal generation is not replaced by natural gas, either because of an uptick in renewable generation or because coal generation declines are absorbing the reduced electric loads, so more natural gas generation is not needed, Moody’s argued.

Moody’s also included a caveat that “unanticipated weather conditions, summer residential load spikes and the length and speed of the economic recovery will all affect the magnitude of the coronavirus outbreak's effect on US power sector carbon emissions.”