Ground Truth Trekking

Coal Power is Not Cheap Power

Erin McKittrick, M.S., David Coil, PhD, Niki Hoagland, and Bretwood Higman, PhD

Figures not showing?  You need JavaScript.  Or you can download a static image of the report.

Abstract

FULL FIGURE

How can ratepayers and utilities best keep electricity prices affordable? Coal is often touted as a source of low-cost electricity, but some believe that coal's negative environmental impacts outweigh any such benefits.  Our analysis examines three different aspects of the cost of coal: coal's impact on retail electricity prices, the estimated future cost of generating electricity with coal, and costs of coal generation not included in the retail price.  By tracing changes in electricity prices in states that changed their energy portfolios we show that using more coal does not actually make power less expensive.  States that reduced their use of coal-fired generators have not seen electricity prices rise, and states that increased coal use have not seen prices drop.  Also, the estimated "levelized cost" of constructing and operating a new coal plant today is more expensive than generating the same amount of power from a new hydro or natural gas plant, and is comparable to the cost of wind power.  Finally, the cost estimates for coal-generated power fail to factor in the "externalized costs" of pollution cleanup, medical bills, and environmental damages borne by the taxpayers and the public.  When these costs are included, coal-fired power is more expensive than all the other generation types we examined.

States with the cheapest energy rely on unique resources and infrastructure

FULL FIGURE

On average, US states that burn more coal pay less for elecricity (Figure 1).  Some argue this shows that increasing coal-fired generation reduces electricity prices. However, a more detailed analysis of power prices over time in the U.S. shows this logic to be flawed.

Among the 48 coal-burning states, there is large variability in both generation portfolio and the price of electricity.  In some cases, these two factors are correlated.  Extensive use of coal is in fact significantly correlated with a low sticker price.  Extensive use of hydropower is also significantly correlated with low prices (Figure 2).  So states seeking to minimize electricity bills might seek to imitate the lowest-cost states: Idaho: 5.7 ¢/kwh, 87% hydropower, or Kentucky: 5.8 ¢/kwh, 94% coal power.

But is it possible to mimic Idaho or Kentucky to provide low cost electricity to consumers?  Many states lack the hydropower resources that would allow them to imitate Idaho.  Similarly, Kentucky is a state with large coal deposits, active coal mines, and an established infrastructure to transport and burn coal, which is not true of most states.  Regional variations in price are impacted by local resources, population, and transmission costs. 

More importantly, the correlation between coal or hydro and prices doesn't tell us whether increasing use of coal or hydro power can cause lower energy prices.  This is an important question for states considering increasing their use of coal-generated power as a way to lower energy prices for their consumers, and for states seeking to lower their use of coal-generated power as a way to reduce environmental impacts. To address this question, we examined states that changed their generation portfolios between 1990 and 2009.

Using less coal does not increase electricity prices - Using more coal doesn't drop them

If using more coal meant lower prices, then those states that increased the proportion of their energy generated from coal should have seen reduced electricity prices.  And states that reduced coal use should have seen their electricity become more expensive.  This is not what has happened.  In the 20 years between 1990 and 2009, even large changes in the percentage of electricity generated from coal had no consistent impact on consumer energy prices.

Out of all forty-eight coal-burning states, there were thirteen significant correlations, and these correlations were nearly evenly split between positive and negative correlations. [See statistics].  The most significant three correlations included South Carolina and Wisconsin, where more coal power was significantly correlated with less expensive energy.  However in Arizona, the pattern was reversed.  Here, more coal power was significantly correlated with more expensive energy.  The 35 states showing no significant correlation between coal generation and price, included Florida, which reduced its use of coal by over 20%, and Colorado, which reduced coal use by nearly 30%.  17 states changed their coal use by more than 15% during the study period, so the lack of correlation cannot be explained by a lack of test cases.  Taken as a whole, there is no relationship between increasing coal use and cheaper electricity.

Over the course of the study period, the percentage of coal use has decreased in the U.S, from 52.5% of generation in 1990, to 44.5% of generation in 2009.  The inflation-adjusted price of electricity nationwide also dropped 1.2 cents in that time period, with no significant correlation between changes in coal use and changes in price.

The lack of a clear correlation means that there are other factors driving consumer electricity prices, and variations appear to be largely regional.  If past trends continue to apply, states experiencing high energy prices will not solve the problem by burning more coal, and states seeking to move away from coal as a fuel for environmental reasons will not see prices rise. 

For newly constructed plants, coal is not the cheapest option

FULL FIGURE
FULL FIGURE

Current consumer prices can’t predict the cost of future electricity. When planning new generation facilities, the variable that best predicts cost is not the "sticker price" (price of electricity using existing generation facilities), but the "levelized cost" (expected price of electricity from a newly-constructed facility).  The Energy Information Administration (EIA) publishes estimates of levelized costs for different power plants, looking at the expected cost of electricity per kilowatt hour from a power plant constructed today (coming online in 2016), averaged over 30 years.  This price includes the cost of building, maintaining, and fueling a new plant over its lifetime, which is then annualized and adjusted for inflation to provide a comparative measure between different generation types.  Most states current electricity prices are lower than these levelized costs (for an equivalent mix of generation), with the exceptions of Alaska, Hawaii, California, and the Northeastern US states (Figure 3). 

Coal, in particular, is expected to be significantly more expensive than current prices indicate.  A conventional coal plant built today would create electricity at 9.5 cents per kilowatt hour, more expensive than the electricity in current coal-reliant states (5.8-9.1 cents/kWh for states using more than 80% coal).  This new coal plant would create electricity very close in price to a new wind plant (9.7 cents) and more expensive than a new plant using natural gas (7 cents) or hydropower (8.6 cents) (Figure 4).

Costs borne by the public make coal the most expensive energy of all

Consumer prices don’t reflect the other significant costs associated with generating power.  These "externalized costs" are defined by economists as the real monetary costs of a product that are not reflected in the price paid by consumers.  For electricity generation, these include the health impacts and taxpayer-borne cleanup costs of pollution, and the economic consequences of environmental damage, climate change, and other impacts of power generation.  Instead of being part of the electric bill, these costs show up instead in tax payments, medical bills, and in reduced economic activity.  Some of these impacts affect people who may receive none of the energy being generated.  With externalities included, the average cost of electricity in the U.S. in 2009 was around 19 cents per kwh, with nearly half of that value (9 cents) due to externalized costs. Including externalized costs, the overall inflation-adjusted cost of electricity has dropped 2 cents between 1990 and 2009, reflecting a small shift to cleaner energy sources (lower externalized costs) in the past 20 years.

FULL FIGURE

Energy sources vary widely in their externalized costs.  Fossil fuels generally have the highest costs, with coal being the highest of all.  For coal, externalized costs include health impacts from air pollutants like mercury and particulates, economic impacts from climate change and environmental degradation, and impacts to taxpayers from environmental cleanup and subsidies.  These costs are often borne most heavily by residents in coal-dependent states, but are hidden from them as consumers. 

Epstein (2011) compiled these costs for coal in the US and found that they added between 9.45 cents and 26.83 cents per killowatt hour to the cost of coal-fired electricity, with the best estimate at 17.8 cents.  Studies of externalities from other sources of power generation are less current and less thorough, but a broad study in Europe showed the lowest costs for wind, nuclear, and hydropower, with externalized costs ranging from 0.2 to 0.5 cents above the sticker price.

FULL FIGURE

Taking into account these hidden costs to our existing power generation portfolio, some of the cheapest energy is found in states that rely heavily on hydropower (Figure 5) (low sticker price, low externalized costs), while states that rely heavily on coal see higher energy costs (low sticker price, high externalized costs) (Figure 6).  The highest prices nationwide by any measure are in Hawaii, with the highest sticker price and large externalities from its primarily oil-fired power generation.

Analyzing changes in generation portfolios over time, we found that altering coal use did not affect the sticker price of electricity.  However, if externalized costs are included in the calculation, the picture changes. Increasing coal use raises total costs and lowering coal use decreases them (Figure 6).  In 30 states, greater coal use was significantly positively correlated with higher total electricity costs.  [See statistics].  Nearly all these states actually reduced their coal use over time, seeing an associated reduction in total costs to consumers and the public. 

FULL FIGURE

Plans for new power generation should consider the actual total cost of the resulting electricity, including both levelized and externalized costs.  In total cost a new coal plant would come in at 27.3 cents per kilowatt hour (9.5 cents levelized cost + 17.8 cents externalities), while a new hydro plant would come in at only 9.1 cents per kilowatt hour (8.6 cents levelized cost + 0.5 cents externalities), more than three times less (Figure 7).  When states are seeking to build new power plants, the lowest total costs are found in wind, hydro, and geothermal plants - all renewable sources.  Of the fossil fuels, natural gas is by far the lowest cost alternative.

>>Next Section>>