Moody’s sees continued decline of coal for power generation

U.S. utility demand for coal will decline significantly between 2020 and 2030, according to a new report from Moody’s Investors Service.

Early retirement of coal-fired power plants will reduce coal-fired generation to as little as 11% of the overall U.S. power generation, down from 27% in 2018.

"We expect that new natural gas-fired generation, and to a much lesser extent renewable energy, will replace most of the thermal coal electric generation capacity heading into retirement,” Benjamin Nelson, vice president and senior credit officer at Moody’s, wrote in the July 10 report.

In a separate report, published June 12, Moody’s analysts noted that even though natural gas prices appear to have stabilized in the $2.50 per million British thermal unit (MMBtu) to $3.50/MMBtu range, they expect the decline in coal use to persist.

They based their outlook on the assumption that all the coal plants that have already announced a retirement year will retire in that year and that any plants more than 50 years old by 2030 will also be retired.

Moody’s noted that many regulated utilities own coal plants that are uneconomic or have book values that exceed market value. Those plants could create a stranded asset risk for regulated utilities, but regulators have “an excellent track record” of allowing utilities to recover stranded costs, Moody’s said. Utilities not under the jurisdiction of state regulators are not afforded the same protections, the analysts noted.

In the June 12 report, Moody’s also addressed the threat coal plants face from renewable resources. While the capital costs of wind and solar power have declined enough to make them “very competitive” in regions with abundant sun and wind resources, even without subsidies, renewables are “substantially more economical for electric systems in areas where the grid has an abundance of existing flexible generation (such as natural gas plants) that can kick in and turn off as needed,” the analysts wrote.

Ironically, Moody’s notes that solar power is becoming somewhat less viable in some of the most favorable areas, such as California and Arizona, because as more solar resources come on to the grid, additional flexible generation or energy storage is required to accommodate intermittent solar output.

As the amount of solar and wind power on the grid continues to grow, flexible generation and the ability to store excess renewable output will become more important, but the cost of energy storage remains high, Moody’s noted. “We estimate that batteries currently cost about $60/MWh, which is roughly twice the cost of generating solar energy,” the analysts wrote.

In some cases, however, batteries can be competitive with a new gas plant, at least for short durations. Moody’s estimated that a 1,000-MW gas plant and a 1,000-MW three-hour battery would both cost about $900 million to build. But, Moody’s said, if a six-hour battery was needed, the cost could be as high as $1.8 billion.

At current costs, Moody’s said reaching 100% renewable energy, as some states have mandated, is technically possible, but it is a “cost-prohibitive proposition in all areas of the U.S., except perhaps in the hydro-rich Pacific Northwest.”

As deployment of renewable resources and gas-fired plants continues to grow, coal-fired generation will continue to decline, which will have “significant impact” on the domestic coal industry, Moody’s noted in its July 10 report.

Utilities consumed about 84% of U.S. coal production in 2018. Further declines in utility usage “would be too significant to replace just through greater participation in other markets, such as industrial or home-heating uses, or by increased exports,” Moody’s wrote.

Coal exports represented 3% to 7% of the U.S. coal market between 2000 and 2010, but had increased to about 15% by 2018, and could reach 25% or more by the early to mid-2020s, Moody’s said. The rating agency warned, however, that most exporters of thermal and metallurgical coal do not have “the cost structures to compete effectively” in the overseas coal market, given the price volatility of the commodity and the cost to ship it to distant markets.