Peter Furniss, the fair-haired chief executive of Footprint Power, gives a tour of the aging coal and oil plant that towers over sailboats in this historic harbor.
The Ivy League-educated lawyer, clad in unsoiled work boots and a pinstripe jacket, circles a mound of coal and walks inside a rusting oil storage tank. He gingerly steps into a tunnel where a conveyer belt carries coal into the plant's furnaces.
Inside the plant, Furniss points out the Roman arches and graceful columns in the turbine room and the half-century-old control panel, an antique compared with the computers that run equipment now. He shows off the boilers and pulverizers. Finally, from the roof, he surveys the scenic coastline, which fades into the autumn fog.
For years, this coal plant — known as one of the state's "filthy five" — has flirted with closure and avoided a costly overhaul that would bring its toxic emissions in line with modern pollution standards. In 2003, Gov. Mitt Romney, R, stood in front of the plant and declared: "I will not create jobs that kill people. That plant kills people."
Nine years later, two of Salem Harbor power plant's generating units are still operating and the other two, including an oil-fired unit, closed last December.
Now, however, the prospect of long-lasting cheap natural gas supplies has sealed the fate of the plant. In August, Footprint Power, run by a group of former utility executives, bought the roughly 60-year-old plant from Dominion Resources and announced they would tear it down in 2014 and replace it with a cleaner, more economical natural-gas-fired unit.
"When we were first looking at the overall project, it really was a toss-up as to whether it would be more the environmental rules or the gas price that was going to drive coal plants to shut down," said Furniss, 45. "It now is very clearly the gas price."
Salem Harbor is a case study of how the shale gas revolution is overthrowing assumptions about energy by undercutting coal prices and usurping it as the nation's fuel of choice for electric power generation.
Across the country, utilities are switching from coal to cheap natural gas. In April, for the first time, natural gas pulled even with coal as a fuel source for power plants. Through August, the use of coal to generate electric power had tumbled 17 percent while the use of natural gas jumped 27 percent, according to the Energy Information Administration.
As of July, companies had announced plans to close down 30 gigawatts of coal-fired plants, or about 10 percent of the nation's total coal plant capacity, by 2016, according to a study by the Brattle Group, a consulting firm. These aren't models of efficiency; the EIA says that the average coal-fired generator to be retired this year is 56 years old.
Overall, this transition might cause the loss of jobs in some coal mines, but it is also creating jobs in areas rich in shale gas. Moreover, the gas glut is cutting utility bills for households and businesses, giving a much-needed boost to the lackluster economy.
In Ohio, for example, households and businesses in 2011 saved about $1.85 billion, or about 20 percent of gas and electricity fuel costs compared with the average from 2007 through 2009, according to Richard Smead, a director of the economic advisory firm Navigant Consulting. The average household saved $232.
Natural gas emits about half as much carbon dioxide as coal does in a power plant. In the first quarter of 2012, carbon dioxide emissions from coal burning fell to the lowest level for any quarter since 1986, according to the EIA.
Overall, U.S. greenhouse emissions fell to their lowest level in 20 years, though warm weather last winter and lower gasoline consumption also played roles. Still, the United States is roughly on track to meet the reduction in greenhouse gases that President Barack Obama has pledged to hit by 2020.
As Salem Harbor shows, the coal industry is primed for upheaval.
The plant opened in 1951. The original GE turbine still anchors the operation. Outside, emission stacks soar as high as 491 feet. Mounds of coal, delivered by barges, sit beside the wooden dock. Automated sprinklers dampen the piles so they don't blow away.
Another throwback: The plant was grandfathered under EPA regulations so that it never had to meet the same environmental standards as new plants. And a 2000 Harvard School of Public Health study estimated that the power plant's emissions could be linked to 53 premature deaths, 16 heart attacks, 14,400 asthma attacks and 570 emergency room visits.
The new owners, Footprint Power, know full well the plant's limitations. To meet environmental standards now, Furniss said, the plant imports low-sulfur coal from Colombia.
The plant runs only when the regional grid managers call on it — which they do based on the weather and the prices at which competing power plants are offering electric power.
Firing up the plant is time-consuming. It takes 10 or 12 hours to get the pulverizers going and the boiler temperatures up. On Oct. 4, the plant was fired up for just the second time since August. It has run 15 more times since then, mostly to provide reliability for the regional grid system.
Compare that with the $800 million natural gas plant Footprint Power hopes to build along with its partner, Toyota Tsusho, part of the Toyota group.
The highest exhaust stack on the natural gas plant will be 230 feet, less than half the tallest of the coal plant stacks. The new plant would be cooled primarily by air and would use 100,000 gallons of water a day; the coal plant cools itself with 100 million gallons of water a day from the harbor, Furniss said. And, with a new generation of gas turbines GE unveiled in September, the plant could ramp up in as little as 15 minutes, not 10 hours. (In Colorado, utility Xcel has already bought GE's turbines for a new natural gas plant that will replace a handful of closed coal plants.)
The Salem natural gas would probably be drawn from Spectra Energy's Algonquin pipeline, which passes just a couple of miles away. The volume of gas flowing through the Algonquin has surged thanks to supplies from the vast Marcellus shale gas play that stretches across Pennsylvania into adjacent states. The coal mounds would disappear.
"Obviously gas is pretty cheap, and one of the things keeping it pretty cheap is the Marcellus," Furniss said. "We assume that prices will rise as the market becomes more mature." While prices today are about $3.80 per thousand cubic feet, Furniss said that Footprint Power assumes prices will not exceed $6 "at the upper end . . . in the foreseeable future."
Furniss said Footprint hopes to get permits by the third quarter of 2013. If the Massachusetts Department of Public Utilities decides the new plant is needed for the reliability of the regional grid, Footprint Power will find it easier to line up contracts and financing.
About a decade ago, the big talk in the utility business was about tossing off the yoke of public service commissions, getting away from steady but modest regulated returns and becoming independent or "merchant" power companies selling electricity to hungry grids that would pay steep prices. The restructuring left many local utility companies, such as Pepco and Baltimore Gas & Electric, without their own power plants and many power plant owners without their own local distribution companies.
Cheap natural gas has decimated those strategies. Its price has dropped so low that merchant power plants using other fuels have been forced to shut down or sell electricity at bargain basement rates.
PPL is a major utility that had re-created itself back when gas was expensive and merchant power was in vogue. The company had positioned itself so that 70 percent of the electric power it generated was sold like a commodity by its "merchant" plants while 30 percent was sold by regulated plants assured of modest rates of return.
Then at a board meeting in Allentown, Pa., in July 2008, the directors realized that cheap natural gas was about to destroy their new business model. Someone charted the PPL stock price, which was closely correlated to natural gas prices, which were starting to plunge. One scenario written up for the board forecast a growing gas glut.
"As we sat around that table, the 'a-ha moment' was when we realized we were making a bet on a business we could not control," PPL chief executive Bill Spence said. "We realized that those reductions in natural gas prices could have devastating effects on our earnings."
So, he said, "we did a complete 180." Goodbye, competitive markets; hello, regulation.
To rebalance itself, the company rushed out and spent about $13 billion buying two regulated utilities, one in Britain and one in Kentucky. Today its position is reversed so that 75 percent of its operations are regulated and 20 to 25 percent are selling power into competitive markets. Now PPL plans to spend $18 billion over the next five years, and it expects to get a safe regulated return on that investment.
One of those projects: A new natural-gas-fired plant in Kentucky that will replace three half-century-old coal plants with a total of 800 megawatts of capacity.
If PPL hadn't changed direction, Spence said, "we would potentially have been in junk bond status and our ability to pay dividends might have been called into question."
The last time the United States made a dash to gas, it ended badly. From 1998 to 2001 utilities quickly built 70 gigawatts of natural-gas-fired plants; from 2001 to 2003, they added another 105 gigawatts. Most of those plants — with more than enough capacity to replace the nation's entire nuclear power fleet — went idle as gas prices soared, hitting $15 per thousand cubic feet after Hurricane Katrina.
Will this time be different?
Gas-producing companies say that supplies are plentiful enough for decades to come. Indeed, they're plentiful enough to hurt the prospects for renewable energy, too, said Bob Shapard, chief executive of Texas utility Oncor. "When you have power this cheap, and the idea that gas is there and plentiful and will last forever, you lose the focus," Shapard said.
"Natural gas is being talked about as serving as 'a bridge fuel' but could very well wind up being locked in as the next-generation fuel, which would not be good at all," Lisa Nurnberger, then-spokesman for the Natural Resources Defense Council, said earlier this year. "Natural gas could wind up crowding [out] renewables." (Nurnberger is now a spokesman for the Union of Concerned Scientists.)
But prices could rebound somewhat with an improved economy and a cold winter, and some experts caution that the switch to gas might slow down, even if it doesn't reverse. The newest and most efficient coal plants, relatively few in number, might be able to compete. Furniss said that even Salem Harbor expects to run more often during the winter thanks in part to the recent uptick in gas prices.
The giant utility AEP stands in the vortex of the price and planning maelstrom. One of the two biggest consumers of coal in the United States, AEP over the past decade bought idle natural gas plants at pennies on the dollar when gas prices were high. AEP used them only occasionally during peak times, such as hot summer days. But this year, AEP has been running the gas plants at around 70 percent of their capacity, much higher than expected. Meanwhile, its coal plants have been running a little less than half the time, the company said.
"In years past, we used as much coal as we could," AEP chief executive Nicholas Akins said. "In our system, we used to use 80 million tons a year. This year, we only expect to burn about 55 million tons."
AEP is completing work on a highly efficient "ultra-supercritical" coal plant, but Akins said that "for the next decade if not longer we are not building any new coal units." He said future plants would tap gas flowing from the nearby Marcellus and Utica shale reserves that Akins calls a "tremendous benefit and tremendous game changer."
Recently, however, as natural gas prices have edged up, AEP is starting to see its coal plants picking up.
"For us, you get in that gas price of $3 to $3.25 per [thousand cubic feet], you're going to start that switch to — back to — coal," Akins said on an earnings conference call Oct. 24. "I think for other utilities, it's higher." He noted that "our mines were located close to the plants and . . . coal comes in by the river and we have pretty advantageous contracts."
In Kentucky, officials face a dilemma. AEP has a coal plant there that needs $1 billion of scrubbers and other environmental controls to stay open past 2015. State officials would like to keep it open because Kentucky coal mines supply the plant. But the state doesn't want to approve the $1 billion in retrofits, which Akins says would increase electricity rates by 30 percent, hurting consumers and businesses. On the other hand, the state needs the generating capacity and building a new natural gas plant will also cost nearly $1 billion.
So will gas stay cheaper than coal?
"The issue becomes where do you think gas prices are going to go versus where you think coal prices are going to go," Akins said in the interview. "It's a difficult proposition."
Meanwhile, at the Salem Harbor docks, Footprint Power has paid a consulting firm to collect bore samples 100 feet deep to figure out how to clean up once the coal is gone.
The new natural gas plant will take up only a third as much space as the coal plant, so the town of Salem could expand its dock for bigger ferry boats or even cruise ships. The town has built a tourist industry around the history of the witch trials of 1692 and 1693. Just outside the plant stands another attraction, the "House of Seven Gables" that Nathaniel Hawthorne used as the model for his novel about a home cursed by a man wrongfully hanged for witchcraft.
All things being relative, the community is pleased. "I was quite publicly opposed to the idea of another fossil-fuel-burning power plant replacing the existing fossil-fuel-burning plant," said Lori Ehrlich, a state representative who stood near Romney the day he criticized the plant in 2003. "I saw it as an opportunity for a bit more imagination." She would have preferred a marine biotechnology development now underway at a different old coal plant site down the coast.
"That said," she added, "I would choose a brand new, cleaner-burning natural gas plant over a 1950s-vintage, unscrubbed, coal-burning power plant any day. So it's a vast improvement."
"This plant is not the future, but it is a bridge to the future," Furniss said. "This project is screaming to be done."