The U.S. power sector's success since 2005 in reducing carbon dioxide emissions (CO2) was slowed in 2021 as market factors now being reproduced by the war in Ukraine forced more use of coal.

As the U.S. economy recovered from the COVID-19 pandemic in 2021, electricity demand rose 3%, but economy-wide CO2 emissions grew 6.2% when the price of natural gas spiked and it was replaced by lower-cost, higher CO2 emitting coal generation, a January Rhodium Group preliminary assessment found. That may not disrupt long-term U.S. power sector CO2 reductions, but similar market changes caused by the war in Ukraine could, some utilities and analysts worry.

"One year of data is not conclusive, but this increase in emissions is not a step in the right direction," Rhodium Group Energy and Climate Practice Senior Analyst Ben King told Utility Dive. "Natural gas has been increasingly displacing coal in the dispatch stack, but coal is moving into the money" as demand for natural gas drives its price up, he added. 

Last year's market changes seemed unique to the COVID recovery, as electricity demand grew and renewables-driven supply uncertainties and load uncertainties accelerated, according to utility and power sector analysts. But a February National Academy of Sciences study suggests the high natural gas prices and increased use of coal are due to a worrying pattern created by market factors developing over the last decade.

"More often in 2019 than in 2010, coal substituted for natural gas in marginal hours," University of North Carolina Professor of Environmental Economics Andrew J. Yates said. "Total emissions were not higher in 2019 than in 2010 but the extra emissions from extra electricity demand were slightly higher in 2019 than in 2010."

Post-COVID market factors drove 2021's increased marginal coal use and increased CO2 emissions, Yates, King and others agreed. Ukraine war-driven near-term European demand for U.S. liquified natural gas (LNG), along with other market factors, could similarly impact 2022 U.S. emissions, utilities and analysts cautiously — and sometimes reluctantly — acknowledged. But utility commitments and policy mandates for renewables and coal closures could make 2021 a momentary hesitation in the ongoing climate fight, they added.

2021's emissions reversal

CO2 emissions from electricity generation in 2020 were about half the projections made in 2005 and 40% below actual 2005 levels, according to a Department of Energy (DOE) April 2021 study. But post-COVID economics disrupted that.

The Rhodium-estimated 6.2% increase in U.S. CO2 emissions last year was faster than the nation's 5.7% 2021 real gross domestic product growth reported Jan. 27 by the Department of Commerce's Bureau of Economic Analysis. The accelerated emissions growth was driven by the tentative COVID recovery's increased use of transportation fuels and the power sector's 17% increase in coal generation, Rhodium said.

Coal creates more than twice the CO2 emissions as natural gas, according to the Union of Concerned Scientists.

U.S. CO2 emissions went "from 22.2% below 2005 levels in 2020 to only 17.4% below 2005 levels in 2021, putting the U.S. even further off track from achieving its 2025 and 2030 climate targets," Rhodium reported. Transportation sector CO2 emissions were up 10% and power sector CO2 emissions were 6.6% higher than 2020 emissions, while other sectors' CO2 emissions contributed relatively little to overall emissions growth, the report added.

The transportation sector's CO2 emissions grew, but the first year-over-year increase since 2014 in the power sector's 28% share of U.S. CO2 emissions was driven largely by an unanticipated and sharp spike in natural gas prices, Rhodium reported.

Henry Hub 2021 natural gas spot prices averaged $4.93 per million British thermal units (MMBTU), more than double the 2020 average, Rhodium calculated. Prices in March 2021 were near $2.50/MMBTU, spiked in the fall, and remained high into early 2022, according to WTRG Economics.

That led to natural gas's share of overall U.S. electricity generation falling from 40% to 37% in 2021, while coal's share increased from 20% to 23% and renewables grew 4% to 20%, according to Rhodium. These results make "the U.S. further off track to meeting its Paris Agreement target of reducing emissions 50% to 52% below 2005 levels by 2030," it added.

"There was never going to be a perfectly linear and smooth progress to those goals," Rhodium's King said. But recent substantial power sector CO2 emissions declines were produced by a combination of coal plant regulations, state clean energy mandates and cheap natural gas, and this reversal shows new federal and state policy is needed, he added.

But the design of policy to accomplish that should recognize how coal was used in the power sector from 2010 to 2019, according to a Feb. 14 National Academy of Sciences study of U.S. power system economics.

Coal on the margin

Average U.S. power sector emissions decreased 28% between 2010 and 2019 but "marginal emissions have increased 7% nationally," the paper reported. That "shift toward greater reliance on coal to satisfy marginal electricity use" should be part of new climate policy design or impacts of the policy's benefits may be overestimated by using average emissions instead of marginal emissions, the paper added.

"Average emissions is the total amount of carbon emissions divided by the total amount of electricity," Yates said. "Marginal emissions" is a calculation of the increase in those emissions produced from an incremental increase in the hourly load, he added.

"Load has stayed approximately constant over the last decade," Yates said. "But in 2019, there was a 7% higher probability than in 2010 that a coal plant responded to an increase in demand in a given hour than a natural gas plant," and at the current $40/tonne to $60/tonne social cost of carbon those extra emissions represent a significant cost that will compound as the societal costs for carbon like health and environmental harms grow, he added.

In the absence of new policies limiting this shift, the life of coal in the U.S. generating fleet and the rising marginal emissions it produces could continue, Yates said.

Attention to average emissions instead of marginal emissions could also overstate the promise of electric vehicles (EVs), the paper said. Transportation electrification reduces CO2 emissions from powering vehicles but increases electricity use, and overlooking the increase in marginal CO2 emissions from that would overstate EVs' power sector emissions reduction value by 58%, the paper estimated.

The failure to use marginal emissions in policy assessment forecasts risks being "overoptimistic" about potential carbon emissions reductions, the paper's authors wrote. Policies should be designed to lower both average and marginal emissions, and "the obvious approach for meeting this dual objective is to eliminate coal-fired generation over the next decade."

Marginal emissions can be a "quite useful" way to assess short-term effects of policy, and new more aggressive policy that recognizes those effects is needed, Rhodium's King responded. But a marginal emissions assessment may also miss how the power sector is already on track to reduce today's coal fleet, to add far more clean energy resources than is in use today, and to adapt new EV loads to improve CO2 emissions reduction benefits going forward, he said.

The 2021 emissions spike, however calculated, did not change the responses of most utilities to the policy and economic drivers accelerating the energy transition, they told Utility Dive. But last year's spiking gas prices and supply chain-compromised renewables growth has a threatening similarity to the Ukraine war's market-disrupting high natural gas, coal and supply chain prices, some acknowledged.

Mixed utility perspectives

Responses to the market factors created by the Ukraine war by the nation's almost 200 investor-owned electric utilities will vary with their customer bases, said Edison Electric Institute (EEI) General Counsel, Corporate Secretary, and Senior Vice President, Clean Energy, Emily Fisher. 

High natural gas prices could increase CO2 emissions for some, but they could also lead to long-term "structural" changes for many, like increased integration of renewables in place of coal, she said. "No investor-owned utility has added or proposed a new coal plant since 2010."

EEI members have zero emissions commitments, are announcing coal closures, and helped renewables hit 20% of the resource mix for the first time in 2021, validating forecasts for emissions reductions over the long term, Fisher said. Any "dispatch of coal on the margin is likely to be balanced by clean energy over time because those other things are not changing."

Since 2014, over 90% of new generation added by the U.S.'s more than 2000 publicly-owned utilities has been wind, solar and natural gas, and that development is likely to prevent long term marginal use of coal, agreed American Public Power Association Director, Policy Research and Analysis, Paul Zummo.

Economic factors that impacted both investor-owned and publicly-owned utilities in 2021 are comparable to those now being created by the Ukraine war. But many utilities remain focused on long-term goals.

Entergy had more coal-fired generation called into use than it had planned for, increasing its 2021 emissions, said Entergy Vice President of Sustainability and Environmental Policy John Weiss. And despite the war's potential to drive similar power sector impacts, Weiss remains confident Entergy will continue to reduce emissions. "No one ever promised this would be easy, and we are 100% committed to retiring all coal generation by 2030 and to net zero emissions by 2050," he said.

Florida Municipal Power Agency (FMPA), which serves 31 cities, has an 80% natural gas power mix, but is reducing its rate of CO2 emissions growth, said General Manager and CEO Jacob Williams. Coal, now 13% of its mix, will be fully replaced by natural gas and solar by 2027 because the price of coal in Florida has been even higher than in other states and is rising from Ukraine war impacts, making natural gas FMPA's least cost choice on the margin, Williams added.

Arizona Public Service's CO2 emissions have fluctuated with economic drivers like natural gas prices, but its high penetration of renewables allowed it to keep its CO2 emissions 25% below the company's 2005 baseline in 2021, its Director of Sustainability Eric Massey told Utility Dive. 

Even if coal remains more cost-competitive than natural gas and the Ukraine war continues to cause CO2 emissions changes in the near term, "all APS's coal plants will be closed by 2031," Massey said. And APS will continue investing in and building a renewable energy and battery storage future because "the long-term economics make sense," he added.

Similar responses came from Duke Energy, Xcel Energy and PacifiCorp spokespeople. But all the utilities said they were closely monitoring the impacts of events in Eastern Europe on energy markets.

War and natural gas

With the Russian threat to Ukraine, January Henry Hub natural gas prices spiked to over $6/MMBTU, WTRG Economics data showed. In February, they fell slightly to between $4.50/MMBTU and $5/MMBTU, but they remained near or over $5/MMBTU throughout March as the invasion went on.

Those price spikes, due to competition from the use of natural gas to export LNG to Europe, "are the kind of external shocks U.S. climate goals are at risk from," Rhodium's King said. And those price shocks could be sustained because "U.S. LNG export terminals are reportedly operating at nearly full capacity and new ones take a long time to permit and build," he added.  

"Every molecule that can escape this country as LNG is being exported and any extra ton of coal is being exported," added FMPA's Williams, a former Peabody Coal executive who has been watching both markets. If policy allows it, U.S. coal and natural gas production can ramp up to meet both global and domestic demand, which may increase domestic prices and prevent emissions reductions, but will "take money out of Putin's hands," he said.

The war in Ukraine is moving U.S. and international energy markets "into unknown territory," admitted APPA's Zummo. "And there may be some increased use of coal as the marginal unit, but upward price pressure on natural gas could also lead to innovation and new renewable supplies that balance demand," he said, echoing EEI's Fisher.

Current international events could create 2021-like market dynamics "for some time," limiting U.S. power sector CO2 emissions reductions, acknowledged Lawrence Berkeley National Laboratory Senior Scientist Ryan Wiser, lead author of the April 2021 DOE report on power sector CO2 reductions since 2005.

Those events could, however, also "drive the economics of wind and solar," and could increase renewables deployment and reduce U.S. power sector CO2 emissions, Wiser added. But the 2021 rise in natural gas prices and resulting increase in U.S. coal use and CO2 emissions were "a sobering reminder" of how shifting market factors can impact the fight against climate change, Wiser said.