Burgh Energy Report: Backyard Brawl II

The war between coal and natural gas is heating up. At least, the media is starting to notice:

"It's pretty clear that, whether it's caused by future carbon legislation or action by the EPA, the migration away from coal has begun," says Constellation Energy Group Chief Executive Mayo Shattuck.

Coal-burning facilities are expected to slip to 10% of total new capacity in the U.S. in 2013, down from 18% in 2009, the U.S. Energy Information Administration reports. Gas, meanwhile, is expected to soar to 82% of new capacity in 2013 from 42% last year.

Natural gas also has the edge in Europe. In 2009, far more gas- than coal-burning plants were built in the European Union—24% of new capacity versus 8.7%.

In China and India, though, no such shift is occurring—yet. Both nations rely on coal—an abundant local resource—for most of their power and lack the sort of integrated gas-pipeline networks that make switching to gas possible in the U.S. China's government has pledged to roughly double the percentage of electricity the country gets from non-fossil sources, to 15% from 8%, by 2020. But much of that new energy will come from hydropower. India, meanwhile, has agreed to cut its carbon emissions 20% from 2005 levels by 2020. But the country doesn't have enough domestic gas to support a large-scale shift to that fuel, although government agencies are considering increasing imports of liquefied natural gas to take advantage of a growing global glut.

The falling price of natural gas in the U.S., to about $4 per one million British thermal units, has helped gas capture an ever-increasing share of power generation. Hardly a week goes by without a company announcing changes that push coal to the sidelines, usually in favor of natural gas, renewables or nuclear plants.

I think the key variable is the learning curve for the natural gas industry. The lobbying efforts and public relations campaigns I've seen during the shale rush have been clumsy at best. King coal is much more media savvy and sophisticated.

The situation in Pennsylvania concerning the Marcellus Play is fun to track. The coming boom is met with a great deal of skepticism. Meanwhile, drillers continue to act as if they are in a position of leverage:

The Democratic governor set the table in February 2009 when he first proposed a tax equivalent to West Virginia's - 5 percent on the sale value, plus 4.7 cents per thousand cubic feet of gas. At that rate, Pennsylvania would land somewhere in the middle of the various tax rates imposed by natural gas-producing states, although industry representatives say it would be the highest among the states with gas-yielding shale formations.

Such a tax is projected to raise $280 million in 2011, the Rendell administration said.

But the companies drilling into the Marcellus Shale - which include homegrown businesses and some of the world's largest exploration companies - view that rate as too high. They warn that adopting West Virginia's tax structure could prompt some to send rigs, jobs and money for compressor stations and pipelines to shale formations in other states.

I think that's an empty threat. Some company is going to develop the Marcellus. The proximity to major markets is too valuable and New York State has effectively banned drilling for the time being. A deal should be struck that channels tax revenue towards migration to natural gas energy plants might satisfy both sides. However, the money is supposedly earmarked for environmental considerations, which is a big deal in selling the extraction to PA residents.

The natural gas industry is increasingly vilified in Pennsylvania. I don't see how the Marcellus Shale Coalition is in any position to dictate terms, thus all the smoke and mirrors about the deluge of jobs yet to emerge. The Coalition's image is already tarnished while environmental groups get their act together ("Gasland" buzz has been tremendous and effective). Unconventional gas could use a few allies right now.