De-Carbonizing Electricity – Will King Coal Finally Be Dethroned?

1. The use of coal for electrical generation from April 2008 to April 2009 declined substantially. Rather than being caused by a trend toward decarbonization, a review of the data provided in this article suggests an alternate interpretation.
   1) Coal is used to produce nearly half of all electricty in the USA. If a decline in electricty production was equally apportioned to the various energy sources, coal would still have seen a substantial decline.
   2) Industrial use declined more than commercial or residential. Coal plants tend to be sited in locations with large industrial applications.
   3) The one year period selected saw an enormous spike in all energy costs, including coal. However, when costs crashed in the fall and winter, the price of coal reacted more slowly and to a lesser degree.
   4) A number of gas fired plants have been upgraded to combined cycle, increasing their efficiency and offsetting the relative expense of nat gas.
   5) Toward the end of the measurement period, the price of nat gas was nearing economic parity versus coal.
   6) Various factors, e.g. RPS, etc., tend to favor the use of renewable energy sources, once operational, over coal. This is particulalry true when fuel costs are increasing and base load demand is declining.
   Although I suspect coal’s days are numbered, I think it is premature to sound the funeral dirge.

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2. Entirely agree m alexy – I didn’t mean to suggest that the drop in coal generation over the past year was due to a secular decline in coal use. The drop is almost entirely due to reduced demand in industrial areas that, as you point out, tend to have generation mixes that are heavily weighted in coal. In other words, this is a cyclical event and not a structural one…yet.
   The question I want to raise here is will coal, once the economic storm has passed, return to its former prominence, or are we on the edge of a secular decline ushered in by higher carbon prices, reduced demand due to load abatement through commercial and residential solar PV deployment and energy efficiency, and growing subsidies for low-emissions power?
   I think we are.

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3. Charles Morand, you and I appear to be largely in agreement as to the long term trend for coal. As I indicated, the days of coal, particularly in the USA, appear to be numbered. To me, the best indicator is the number of coal fired generation plants cancelled or delayed in the last three years. Contrast that with new nat gas plants or even renewables, wind particularly. Even nuclear may supplant coal. Part of the justification for two new nukes for Progress Energy in Florida is they will enable shuttering old coal plants.
   That being said, coal will not depart quickly nor easily. Coal provides roughly half of all USA electric energy. Further, this is baseload generation. In contrast, much of the renewable capacity additions for the next decade will not be supportive of baseload substitution. Yes, in time solar thermal, geothermal, efficiency, networked large scale wind, etc. can provide baseload. But, that is a decade away in meaningful quantity.
   You specifically mention commercial & residential PV as potential competition for coal. Again, this seems unlikely for the next decade. They could, however, compete with peaking combustion turbines.
   Certainly carbon costs due to legislative action can impact the cost effectiveness of coal. But, based on legislation in Congress, this too seems unlikely to have substantial effect much before 2020.
   Further still is the fact that not all coal is equal. “Met” coal is likely to be valuable for the long term. And, Powder River coal is quite inexpensive and much is burned near the mine mouth. As such, even with carbon costs, it will be cost effective for quite a while. On the other hand, Appalachian coal is increasingly expensive and is used in markets that appear somewhat sensitive to its negative aspects. So, Appalachian coal(other than “met”) seems most likely to experience diminshed use in the nearer term.
   My point is that, although we agree on the long term trend, we may not be in sync with regard to the short to medium term nor to specific types/sources of coal. This is important for investments. While I would certainly consider trading coal mining stocks on short term volatility, I would not hold them as a long term investment. And, although I might short them long term…why bother? There are better/sooner opportunities.
   Summing it up, I believe coal stocks will likely be volatile with a downward bias. Although, occasional upward spikes should be anticipated, these shares have probably seen their peak.

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4. Agreed coal will die hard and long. And as I point out in the original article, incremental demand from India and China could more than offset a decline in demand here and, assuming it remains economical to transport coal by ship in the mid-term, the impact on miners or on the power generation equipment makers could be minimal. My view on oil prices leads me to believe that shipping coal to Asia will be increasingly uneconomical, so I agree with your view on the long-term downward bias.
   In terms of solar PV, you are right and thanks for correcting me; solar PV competes more directly with gas peakers than it does with baseload coal. Energy efficiency of the non-demand response kind, on the other hand, does compete directly with baseload generation. The millions of dollars currently going into weatherization programs across the country will result in some permanent load abatement. A continued push for building efficiency in the next 3 years could be material in areas with winter demand peaks such as the northern part of the mid-west, which incidentally consumes a lot of coal for power gen.
   The price of coal is extremely low as you point out. The same EIA report to which I link speaks of coal prices that are substantially below gas prices on a per MMBtu basis and Waxman-Markey is not likely to make up that gap as you point out. Coal is unlikely to disappear due to unfavorable economics alone given the political fall-out that would result from pricing carbon too high.
   Thanks for sharing your views on coal stocks! That’s what I was hoping to foster with the article.

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5. After considering my prior post, I would add that our belief that coal’s use has largely peaked is contrary to the forecast from the EIA. They estimate that during the next 20 years approximately 40 large coal plants will be built. While this may be possible, I don’t think it is likely. Certainly construction in process will be completed. Also, some CCS experimental facilities seem likely. And, some facilities may be upgraded/replaced for efficiency. Cummulatively these, when combined with increased generation after recovery from the economic slump, may result in greater coal consumption. This would in turn result in higher coal prices and higher coal mining stock prices. But I think this is the most optimistic case for coal.
   I would also add that another important competitor against coal will be biomass. This seems particularly likely regionally such as in the Southeast.

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6. As with your original article, we are again in general agreement.
   However, when comparing the cost of coal to the cost of nat gas (actually when performing any such comparison) simply evaluating fuel costs is insufficient. At a minimum, one needs to consider all the variable costs including O&M and the difference in heat rates. For example, a nat gas combined cycle plant will have a heat rate somewhere between 30% and 100% better than coal. (Yeah, I know that is a huge range…but there are a number of variables. 50% is probably a not an unreasonable overall approximation.) Further, when considering new build, coal plants are substantially more expensive and take much more time, resulting in much greater project financing costs and risks. And, gas plants, even combined cycle, have more flexibility to ramp against the electrical load. Thus they have the potential to provide more valuable energy.
   Further still, there is the issue of transportation cost and availability. Coal transport was definitely “tight” in 2008.
   Finally, as I mentioned previously, although coal prices are “low”, there are a variety of coal prices. Appalachian coal used in the Mid-Atlantic is much more expensive than Powder River. And Powder River coal delivered to the Four Corners Generating Facility is much cheaper than the same coal delivered to Florida. So, it would seem to me that when off-shore wind proliferates, particulalry at competitive costs along the New England and Mid-Atlantic coasts, coal plants in those areas may be under pressure. Combine that with competitive distributed CHP in that area and coal plants will likely begin to disappear. On the other hand…Four Corners will be there four quite a while.
   One last point regards efficiency. Certainly I agree with your point about weatherization. However, I believe efficiency will actually be much more pervasive (for good and bad). My favorite single example is somewhat esoteric, uranium enrichment. Presently this is a very energy intensive process in the USA based on gaseous diffusion. Several companies are proposing to convert to centrifuge enrichment which is much more energy efficient. Largely under the radar GE is working on Laser based enrichment which is much more efficient than centrifuging. (The actual efficiency is classified but”much” better.) Results seem to indicate they are on track for operation to begin within 5 years at their NC facility. If so, the reduction in energy consumption is potentially enormous. How big, well just to give a sense of the benefit, TVA and Grand Coulee generating facilities were built largely to support the A-bomb development efforts. Extending these thoughts, I have been in a number of automotive assembly, stamping, etc. plants that have now been shuttered. Many of the remaining plants are more efficient. And, I expect as facilities are (re)opened they too will be more efficient. Bad news for unemployment, but…
   My point to this is that I suspect efficiency will be a real surprise over the next decade, more than offsetting any new load due to “plug-in vehicles”.
   Based on everything I know, coal is going away…slowly…but…going away nonetheless.
   Great conversation.

   Reply

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