Markets Drift from Coal to Gas ... For Now

Cap-and-trade is dead in Washington, DC, and any talk of a substitute carbon pricing mechanism such as a revenue-neutral tax is stuck in the political version of the Sargasso Sea.

Market currents, on the other hand, are always in motion, and the current drift in U.S. power generation markets is away from more carbon-intensive coal and towards less carbon-intensive natural gas. Asian demand is putting upward pressure on the price of coal and abundant shale gas reserves, in contrast, are keeping the price of gas down. In tandem, the markets have imposed a kind of carbon price that has darkened the outlook for U.S. "merchant" coal plants, those built by developers to compete in wholesale power markets.

Another change is  a dramatic shift from a historic pattern. Gas and oil prices have come uncoupled. It used to be that gas prices would tag along with oil prices like a tyke following a big brother. No longer. Gas has grown up as a result of technological advances that enabled the production of gas from shale formations that the industry always knew were deep underground but until recently could not reach. Prices have trended down, even as oil prices have surged upward in response to global demand and Middle East unrest.

In a new report, Fitch Investment Services said "the current dynamics appear to have long-term implications and do not bode well for coal-fired generators."

That's good, but markets can change. It's up to the gas industry to maintain its advantage over coal by acknowledging that gas production has environmental risks and taking steps to minimize them. It's in the gas industry's interest to accept sensible regulation designed to keep methane and other nasties out of drinking water supplies, and to chase out fly-by-night operators that lack capital and will necessary to produce gas safely.

Oh, and the need for a carbon price won't go away either. Coal plants aren't going away anytime soon, and market forces alone won't tamp down greenhouse gas emissions. Even if industrial-scale carbon capture and sequestration technology were ready to go on market shelves today, it likely would be expensive from plant owners' point of view and wouldn't sell without the economic driver that a carbon price would create.

Markets are powerful for effecting a shift to cleaner energy, but sometimes they need a little prodding to tell the full truth about the costs of dirty energy.