Withdrawing from Paris Agreement: U.S.’ decarbonisation efforts to continue
- Written by Michael Ferguson, Director, U.S. Energy Infrastructure, S&P Global Ratings
Arguably, President Trump owed much of his victorious campaign in 2016 to gaining unexpected support in the Rust Belt – where high concentrations of coal-fired generators are under threat from natural gas’s rise to prominence. To address the adverse economic effects that the coal-to-gas switch has created for coal-heavy states, the Trump Administration has introduced measures in the hope of reviving the American coal industry. First, Trump announced that the Obama Administration’s climate reduction policy, the Clean Power Plan (CPP), would be rolled back. Then in June came an announcement that sent reverberations across global energy sectors: The President declared his intention to withdraw the U.S. from the Paris Agreement before 2020.
The controversy that followed aside, can the Administration’s assumed intentions of reinvigorating the coal sector be achieved by rolling back clean energy initiatives? In our view, coal’s renaissance remains unlikely and the Administration’s actions seem consistent with a belief that carbon regulation has been responsible for coal’s demise. While the shift toward gas-fired generation has had the ancillary consequence of reducing carbon emissions, this has been driven, in large part, by economics. As such, we believe that the outlook for gas-fired generation, at least, will remain largely unaffected by the decision to withdraw from the Paris Agreement in the near-term.
To understand why the Administration’s focus on emission reduction regulatory rollbacks may not benefit the coal industry, one need only consider the past seven years in the energy sector. The burgeoning U.S. gas-fired energy sector is making significant gains in the competitive markets. Plummeting gas prices and more efficient gas turbines have prompted the closure of coal-fired generators with a total capacity of 100 gigawatts (GW).
The boom in natural gas production from the Marcellus and Utica shales has transformed the power markets. Drilling in the country’s Appalachian Basin, which began in 2011, precipitated a surge in conversion to gas, with coal declining to less than 30% of total generation in recent years. Because the relatively inexpensive gas will continue to flow, we do not foresee an exit from the Paris Agreement having a detrimental effect on gas-fired generation. While this may not please gas’s competitors, it would be misguided to attribute the dominance of gas to any regulatory advantage.
So, what has this meant for coal? Regardless of the CPP’s future – or how stringently the U.S. would have had to reduce emissions under its Nationally Determined Contributions (NDC) proposed in Paris – coal has simply become less economical. Consequently, it seems unlikely that coal is going to resume its previous position at the lower end of the dispatch stack in competitive markets. Adding to the challenge, the increasing intermittency of the U.S. grid (in terms of renewables and demand reduction) may place additional burdens on assets, namely supercritical coal assets, that are less able to respond to changing net demand patterns by ramping production up or down efficiently.
Another significant consideration of the U.S.’ withdrawal from Paris – in addition to the CPP’s repeal – is the effects on the country’s shift toward decarbonisation. Certainly, the announcement has raised doubts over whether the U.S. can reach its prior commitment to reducing emissions by 28% before 2025 from outside the Paris Agreement.
Of course, the previous administration oversaw a reduction in emissions without any then-active federal obligations. This has been encouraged by cheaper gas, biofuel developments, the falling costs of renewable technology, diminishing energy demand and, perhaps most importantly, a number of state-level initiatives. For instance, it seems unlikely that progressive states, such as New York or California, will retreat on decarbonisation efforts – and may even be inclined to step up their efforts.
Moreover, Trump’s election victory may have altered the fate of nuclear assets. Similar to coal assets, in competitive markets nuclear assets have been witnessing weaker cash flows due to cheap competing gas and a changing grid. Unlike coal, however, many states viewed nuclear – the only baseload zero-emission power source – as critical for meeting carbon reduction goals that were based on historical baselines (which included nuclear). This gave states a considerable incentive to support nuclear assets during the CPP’s opening period. Indeed, both Illinois and New York cited carbon reduction as one justification for subsidies. But without those reduction goals in focus, that may be a harder sell now. And other states with fledgling nuclear assets, including New Jersey, Ohio, and Pennsylvania, may have not have the same motivation to aid nuclear assets.
We expect that the Trump Administration could – temporarily, at least – slow the course of decarbonisation on the U.S. grid. And although, looking ahead, market forces (mostly cheaper gas) may be responsible for lower emissions, the U.S. will likely struggle to meet its 2025 climate goal as it stands. By chance, the earliest date that the U.S. can complete its withdrawal from the Paris Agreement will coincide with the next presidential election. Whether the withdrawal really hinges upon a Trump re-election is yet another variable in a period of uncertainty for U.S. energy markets and for global climate change.