Electricity Production under Carbon Constraints: Implications for the Tenth District

By Snead, Mark C. | Economic Review - Federal Reserve Bank of Kansas City, First Quarter 2012 | Go to article overview

Electricity Production under Carbon Constraints: Implications for the Tenth District


Snead, Mark C., Economic Review - Federal Reserve Bank of Kansas City


Coal is the dominant fuel used to produce electricity in the United States, accounting for almost half of production. Although coal is cheap and abundant domestically, the burning of coal releases greenhouse gases (GHG) and particulates. In response, many states have increased the use of cleaner alternative fuels, primarily natural gas and renewable energy. However, roughly half of the states still rely heavily on coal to generate electricity.

In the Federal Reserve's Tenth District, six of seven states are coal-dependent, generating two-thirds or more of their electricity from coal. Coal-intensive states face regulatory risk from increased restrictions on GHG emissions. Forecasts suggest GHG restrictions would rapidly accelerate the use of cleaner fuels, but would require extensive and expensive changes in the mix of generation capacity in many states.

This article examines the potential impact of national GHG restrictions on Tenth District energy producers and consumers. The findings suggest that GHG restrictions would lead to a structural change in the mix of fuels used to generate electricity in most District states, as well as increase electricity costs to District consumers. District natural gas producers would benefit from increased gas consumption, but not as much as emerging natural gas producers in other areas of the country. District coal producers, particularly in Wyoming, would face sharply reduced domestic demand for coal.

The first section of the article examines trends in electricity production and fuel use in the United States and Tenth District states. The second section describes recent U.S. Department of Energy (DOE) forecasts for energy use and production, including a scenario with national GHG restrictions. The third section examines potential impacts of GHG restrictions on District electricity producers and consumers. The fourth section identifies possible spillover effects for District coal and natural gas producers.

I. U.S. AND TENTH DISTRICT ELECTRICITY FUEL USE TRENDS

Historically, the United States has relied on coal for about half of its electricity needs, with a mix of petroleum, natural gas, nuclear power, and renewable energy accounting for the rest. Shares of these fuels have shifted over time in response to market and regulatory forces. In recent years, the growth of coal consumption has slowed and use of natural gas and renewable energy has grown. In contrast, the Tenth District continues to rely heavily on coal and much less on other fuels than the nation.1

Historical U.S. electricity fuel use patterns

The modern U.S. electricity fuel mix began to take shape in the late 1940s with the use of large-scale generators fired by coal, natural gas, and petroleum (Charts 1 and 2). Coal quickly became the dominant fuel. By the 1950s, it had captured a 50-percent share of U.S. electrical generation. Coal steadily gained share until the late 1960s when petroleum use surged and the nuclear power sector emerged. Coal use accelerated again in the 1980s, despite growing concerns about emissions (Hansen and others 1981). Coal's share peaked in 1987 at 58 percent, but has since declined steadily to around 45 percent under rising regulatory pressure. Today, coal remains inexpensive and abundant. The U.S. Energy Information Administration (EIA) estimates a domestic supply of more than 200 years at current mining rates.

Petroleum-fired generation expanded rapidly in the 1940s, but quickly lost favor to cheaper coal and natural gas. Petroleum surged again in the late 1960s amid strong domestic crude oil production. That trend reversed in the 1970s as global crude prices increased and domestic production declined. By 1985, petroleum was mostly gone from the electricity fuel mix and had been redirected to meet growing demand for transportation fuels.

Natural gas use grew amid increased demand for electricity in the 1950s and 1960s. By 1970, natural gas had a share of 25 percent. …

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