Renewable Energy Reality: We're Dependent on Coal

by: David Fessler
The Obama administration has made a big deal about renewable energy. Over the next several years, the new President has plans to spend roughly $150 billion promoting and enabling its growth. And with $700 billion flowing from the United States into OPEC's pockets every year, I don't think you'll get much of an argument from anyone about the timeliness or the need for renewables.

But even with massive amounts of capital investment – and widespread adoption by utilities and end users – renewable energy will still only account for roughly 10% of world energy output by 2030, an increase of only three percentage points from today's estimated 7% contribution. Depending on whom you talk to, however, that estimate is wildly optimistic.

The stark reality of worldwide energy production is a dirty, four-letter word: coal. Since the beginning of the 21st century, its worldwide consumption has outpaced any other fuel source, growing nearly 5% per year. This, too, in the face of prices that have escalated every year since 2000.

Consider 97% of that growth has occurred in emerging market countries, most notably China and India. They've respectively accounted for 66% and 19% of the total increase.

To keep up with the demand, world coal production is projected to increase by nearly 60% by 2030. Every major coal producing country will see huge increases in its coal output: China will almost double its output, India's will more than double and Russia's will rise almost 75%.

What about reserves... is there enough coal out there to meet this huge increase in consumption? The answer is yes. World reserves are more than adequate, with China, Russia and the United States accounting for 60% of them.

Presently, China's a net exporter of coal, but that will change in a year or two. By 2030, China will be importing 88 million tons of the black rock a year. India will be importing a staggering 220 million tons per year, overtaking Europe to become the second-largest importer.

All this is of great benefit to U.S. coal producers, who have seen their exports surge nearly 45% in 2008 alone. They will continue to see increasing exports of coal to China, India and other emerging market countries.

Large investments will be needed on the prospecting side – to identify economically viable deposits – and on the mining side to develop new projects once identified. Total investment in coal-supply infrastructure is expected to be $730 billion through 2030, with 91% of that going to mine development and mining equipment, and the rest for port expansions and shipping upgrades.

Mining Coal's Profits

The safest direct coal play is the Market Vectors Coal ETF (NYSEARCA:KOL), which tracks the performance of the Stowe Coal Index. This gives investors a means of tracking the overall performance of companies engaged in the coal industry. This is a relatively new ETF and it gives investors exposure to the major players in the industry including:

  • Arch Coal (ACI) – One of the largest coal producers in the United States.
  • Peabody Energy (BTU) – The largest private sector coal company in the world, with majority interests in 31 coal operations located throughout the United States and Australia.
  • Bucyrus International, Inc. (NASDAQ:BUCY) – A world leader in above and sub-surface mining equipment.

Another safe coal bet is Joy Global, Inc. (JOYG) – essentially a carbon copy of Bucyrus. Joy's wholly owned China Mining Machinery subsidiary recently acquired Wuxi Shengda, a Chinese manufacturer of long wall shearing machines used in underground mining operations in China.

Speaking of China, the second-largest coal producer in China, Yanzhou Coal Mining Company (NYSE:YZC), owns eight working mines – including one in Australia – with many others under construction. The seven working mainland mines have almost two billion tons of proven reserves. That's enough to run China's power plants for five-and-a-half years.

Of course the negative aspects of increased coal usage are increased greenhouse gas generation. Right now coal is responsible for 42% of greenhouse gasses emitted worldwide. The International Energy Agency estimates that will increase to 46% by 2030, even with aggressive implementation of new carbon capture and storage technology.

Coal is a dirty four-letter word when it comes to energy generation. And unfortunately, even under the best-case scenario, the world will have to depend on it for years to come. Investors would be wise to consider some form of exposure to coal as part of a well-balanced energy and infrastructure portfolio.