 Coal: The Great Divide – By Ken Silverstein Daily IssueAlert 4/27/2005 Free Coal is shining now that high natural gas prices are in the spotlight. When amendments to the Clean Air Act passed in 1990, many green groups let out a sigh of relief: Toxic emissions would get cut by forcing utilities to rely on natural gas and not coal. But, that was 15 years ago. Coal interests have never been more emboldened. Not only has the Bush administration given them more flexibility to fulfill their environmental obligations but it has also worked to fund so-called clean coal technologies that try to improve the fuel source's emission levels. Still, coal owes much of its good fortune to the fact that it is the one fuel source for electric generation that is abundant and cheap. Nuclear facilities are difficult to finance and to permit while natural gas prices remain high because the demand exceeds the supplies available. Not all coal, however, is created equal. There’s eastern and western coal and the primary differences are costs and sulfur content. Western coal is easier to mine and is low in sulfur, a toxic compound considered by many scientists as contributing to the earth’s warming and one of those emissions that regulators are trying to cut. At the same time, western coal costs about $7.15 a ton. That’s considerably less than its eastern cousin, which runs about $60 a ton on the spot market, and also contains more sulfur. A lot of that low-sulfur coal is coming from Wyoming’s Powder River Basin. And while the price of that western version has risen in response to the general rise in costs for all commodities including oil and gas, its future looks good. That’s because the rail transportation system that connects the east and west has improved dramatically, which could enable eastern utilities to take advantage of western coal. That hasn't been cost-effective in the past because of the added costs to transport the commodity, making the ultimate price too high. But, with the value of transport getting better, Wyoming coal could find its way into the heart of Appalachia and other eastern coal centers. “There’s a handful of utilities that want to burn Basin coal but haven’t yet,” says Stephen Doyle, a coal-sector investment specialist, in an interview with the Associated Press. “Anybody who can do it, will do it.” The cost advantages can add up. There’s a trading scheme in place that allows utilities that beat their environmental goals to trade sulfur dioxide credits. Those that pollute more than the allowable sulfur limit can buy those credits. The cost: $880 a ton, a 26 percent increase since the beginning of the year. Because western coal releases little sulfur, some eastern-based utilities may find it more beneficial to haul the coal in from Wyoming—saving on the cost of the coal as well as the price of credits. And while the interest in western coal has always been noticeable, it has only been in the last year that the rail system—responsible for moving two-thirds of all coal shipments—has been up to snuff. “More plans to build new coal-fired plants have been announced in the past year than were announced in the past decade,” says Jack Gerard, president and CEO of the National Mining Association in Washington, D.C. “King coal is back on his throne, generating over half of the electricity used in this country—with sharply lower emissions into the air.” Since 1980, major emissions from U.S. power plants have fallen by about 40 percent—at a period in which economic growth grew by 93 percent and coal use in electricity generation by 75 percent. New air quality standards such as those involving mercury emissions along with emerging technologies that strip pollutants from the coal are also expected to have some positive effect. Coal’s Abundance Coal’s resurgence is also anticipated to help eastern interests. Consider this: Coal from the western United States produces about two-thirds of the heat that eastern U.S. coal produces, because western coal has greater moisture content. That fact, coupled with relatively high transportation costs, means eastern coal is still a powerful force. And when the possibilities presented by new “clean coal” technologies are added to the mix, eastern coal companies say they will compete for a long time. Eastern coal once dominated the market. But, its growth has been largely flat while western coal has overtaken it. In 1990, 630 million tons of eastern coal was produced compared to 399 from western mines. But, by 2004, those numbers were 494 million tons for the east and 627 million for the west. Environmental advocates say that as coal-fired boilers age and as environmental regulations take hold, they will be phased out—even though the Bush administration has taken steps to prolong the lives of those older plants. Utilities that run on natural gas still say it makes sense to avoid coal. The capital cost to build a coal plant along with the strict environmental regulations to do so means that natural gas-fired facilities can get up and running far more quickly—and pollute a lot less once they start operating. Take Calpine Corp., which is an independent power producer that uses mostly natural gas as a fuel source. It says it is not trying to compete with coal at today’s prices. It has been developing its gas reserves and pipelines to serves its plants. The aim is to control 25 percent of the gas that its plants consume as well as to hedge rising prices through long-term contracts. “There is a dire need to replace old generators with new ones and natural gas is still the way to go,” says Ron Walters, a senior vice president for Calpine, in a previous talk with this writer. Coal, however, provides about 54 percent of the electricity that the United States consumes. That’s compared to about 15 percent for natural gas. And while natural gas usage is expected to rise because of environmental regulations, coal’s usage is also anticipated to go up because of rising energy demand, generally speaking. The focus then becomes how best to reduce overall emissions. That brings us back to eastern U.S. coal and western U.S. coal. The competition between the two is healthy. Expanding rail systems along with environmental standards that mandate lower sulfur emissions means eastern utilities are taking a hard look at western coal. And if eastern interests want to contend, then they too must continue to devise ways to pollute less and to keep their price increases in line with those of other commodities. The competition among coal and natural gas may bring a breath of fresh air. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2005. UtiliPoint International, Inc. All rights reserved. |
