According to data from the Energy Information Administration (EIA), for the first time ever the amount of electricity generated by power plants fired by natural gas equaled the amount coming from coal-fired plants.
The growth in gas-fired electricity generation is a direct result of the gas shale revolution and the resulting collapse in gas prices. The EIA reports that in April 2012, the price of natural gas delivered to power plants was at a ten-year low. An offset to the low natural gas price is that spot coal prices have also fallen to modern era lows as coal producers battle to reclaim lost share in the electricity generation market. This assault from low gas prices comes at the same time the Environmental Protection Agency (EPA) introduces new emission regulations targeting the burning of coal.
A benefit of the power generation market fuel mix shift is the impact it is having on the nation's greenhouse gas emissions. The latest data on carbon emissions from the EIA shows a remarkable improvement. In 2011, carbon emissions were down 2.4% from 2010. The EIA projects that emissions will decline a further 2.5% this year before rising by 1.4% in 2013. But what maybe is more important is that the first quarter results show emissions have declined by nearly 7.8% year over year.
Based on the EIA's second quarter estimate, emissions will decline by 4.2% versus the same quarter last year. If that happens, then the first half of 2012 will show about a 6% decline from a year ago. On an annualized basis, 2012 emissions would be 5,166 million metric tons of carbon, or about 2.5% above the emissions of 1990. We suspect that the EIA emission estimates are before the amazing change in fuel consumption in the electric power market. As such, we expect that actual emissions this year may come close to or even beat those of 1990.
The significance of this emissions performance last year and so far this year is that the reduction has occurred without the overriding government mandates helping. In other words, the market has made the moves that free markets are expected to make when fuel price signals are not distorted by regulations. Will emissions be cut further with the implementation of the EPA's mercury and carbon dioxide rules, or increased automobile CAFE standards?
Critics of this analysis will say that the significant improvement in emissions has come due to the economy's weakness, but we would counter by pointing out that no one expected emissions improvement without government intervention and mandates. Free markets do work.
We are headed for a cleaner environment, for which we should all be grateful.
G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the July 17, 2012, issue of PPHB's newsletter "Musings from the Oil Patch."
