Commentary

Coal Meets Markets

While Mitt Romney’s 2012 presidential campaign fades in the rear-view mirror, the issues he ran on — particularly, his charge that President Obama is engaged in an economically disastrous “war on energy” — continue to inflame many conservatives. Nowhere is this more apparent than in the consternation over the shutdowns of coal-fired power plants across America, shutdowns that many conservatives blame on the Obama administration. The Right should resist the temptation to score political points, however, and should instead cheer the closing of those plants.

Over the course of President Obama’s first term, 135 coal-fired power generators were shut down, and at least another 175 have announced that they will go dark by 2016. By 2020, about one-sixth of today’s coal-fired generating capacity will likely have disappeared. Why should conservatives applaud this news? There are two very good reasons.

The first reason is that these coal-fired power plants are being replaced by cheaper gas-fired plants. The gas-fired plants come courtesy of the revolution in hydraulic fracturing (“fracking”), which has delivered a vast supply of low-cost natural gas to an electricity market that has struggled with steadily rising coal prices since 2001. Smaller coal-fired plants are now more expensive to operate than gas-fired plants, and the price gap is narrowing for large plants as well.

Thanks to the revolution in hydraulic fracturing, the Clean Air Act’s economic favoritism is coming to an end, and low-cost natural-gas-fired power is reducing wholesale electricity prices.”

Some have claimed that it’s not cheap gas that’s killing coal; it’s the regulations coming out of President Obama’s EPA, regulations that will cost coal-fired generators an estimated $126-144 billion in compliance expenditures. To be sure, the EPA regulations are expensive, but fuel costs are a much more important factor in the decline of coal. An analysis from the Brattle Group, a consultancy specializing in economics, concludes that future coal-plant closures will be “due mainly to lower expected gas prices.”

Peter Furniss, the CEO of Footprint Power, agrees. Speaking about the Salem (Mass.) Harbor Power Station, which Footprint bought in August 2012, he explained: “When we were first looking at the overall project, it really was a toss-up as to whether it would be more the environmental rules or the gas price that was going to drive coal plants to shut down. It now is very clearly the gas price.”

Should we at least decry the economic dislocations that follow from all this? No. The Bureau of Labor Statistics projects that, in 2020, only 3,100 fewer people will be employed in coal mining than were employed in 2010, while the total output of coal mines will increase from $20.9 billion in 2010 to $27.7 billion in 2020. The job losses will be the result of increased productivity rather than declining coal production.

Complaints about the impact these coal-plant shutdowns will have on consumers are equally ill founded. The Brattle Group analysts concluded that shutdowns will not lead to any regional shortages of power, and while conceding that “it is plausible that there will be at least a transitory increase in wholesale energy prices,” they also said: “We generally expect that the effects on wholesale energy prices will not be very large or long-lasting.” One might expect the predicted loss of 49 to 57 gigawatts of coal-fired generating capacity by 2016 to put stress on the generation sector, but the market can replace that much capacity — and more — in relatively short order. For example, 97 gigawatts of new electrical generating capacity came online between 2007 and 2011, a period of relatively slack demand.

The second reason conservatives should cheer the demise of old coal-fired power plants is that the survival of those plants stems from government interference in markets. Their closure will end the state-sponsored transfer of wealth from everyone else in the electricity-generation business to the owners of these old plants.

Almost all of the coal plants being shuttered were in operation before the passage of the Clean Air Act of 1970. That’s important, because the Clean Air Act imposed emission limits only on facilities built after its passage. Plants already in operation when the act was passed were to be regulated by the states. The EPA could require pre-1970 plants to adopt “best available control technologies” (as determined by the EPA) to limit air pollution — the same standards required of post-1970 power plants — but only if they underwent non-routine modifications that increased emissions.

Environmentalists didn’t mind this provision too much, because they thought the pre-1970 plants could not operate profitably for more than a decade or two. Their confidence was greatly misplaced, for two reasons. First, plant owners were able to modernize their grandfathered facilities without restriction until 1994, because the EPA did little to enforce the provisions requiring updated anti-pollution equipment. After 1994, the EPA decided to police modifications on a case-by-case basis. Those efforts have involved frequent trips to the federal courts to adjudicate difficult disputes about what constitutes a non-routine modification, which is legally equivalent to building a new plant. The industry’s legal and administrative resistance to enforcement added almost 20 years to the life of the old power plants, but court rulings against the industry’s position have now ended that tactic.

Second, the law’s exemptions provided a tremendous cost advantage for pre-1970 facilities relative to post-1970 facilities, and, until recently, industrial obsolescence has not increased costs enough to overcome this state-bequeathed advantage. Installation of a full complement of pollution-control devices, as required for new coal-fired power plants under the Clean Air Act, adds about 25 percent to a plant’s construction cost, and retrofitting those devices onto existing plants would certainly cost even more. New EPA regulations and legal consent decrees have increased the costs of existing plants, but those increases are a minor consideration compared with the doubling of coal prices and the halving of natural-gas prices, which has finally offset the advantage provided by the unfettered right to pollute.

This is a good thing. The proper measure of whether the government is too large is not how much it taxes, spends, or regulates; it’s how much wealth is redistributed as a result. By grandfathering old coal-fired power plants, the government bestowed an artificial economic advantage on them, and, as a consequence, revenue that would otherwise have gone to owners of post-1970 coal-fired plants, gas-fired plants, nuclear power plants, and renewable-energy plants went instead to the owners of pre-1970 coal-fired plants. That this wealth transfer occurred indirectly, via regulatory policy, rather than directly, via fiscal policy, is not particularly important. We would surely object to a proposal to levy a special tax on every post-1970 power plant, with the proceeds going to owners of pre-1970 coal-fired plants; yet the exemption for pre-1970 plants brings about exactly the same result.

Some conservatives argue that the Clean Air Act’s pollution-control regulations are indefensible, and that while it’s unfortunate that new plants are forced to comply with them, at least the old plants do not also have to do so. But can we really believe that their emissions impose no significant health harms on anyone? Most of the coal-fired plants that have been or will be retired during the Obama administration lack any pollution-control devices. One can question current emissions standards and regulatory approaches without denying that some regulation to control pollutants is necessary.

Environmentalists’ blanket hostility to fossil fuels has encouraged many who are hostile to environmentalists to defend the use of all such fuels. But that sentiment should not lead us to blindly defend the existence of all coal-fired generation anywhere, under any circumstances. Thanks to the revolution in hydraulic fracturing, the Clean Air Act’s economic favoritism is coming to an end, and low-cost natural-gas-fired power is reducing wholesale electricity prices. Those who believe in free markets should be pleased.

Jerry Taylor is a senior fellow at the Cato Institute. Peter Van Doren is a senior fellow at the Cato Institute and the editor of the journal Regulation.