Coal Won't Be Replaced Anytime Soon

Electricity and Coal

We do not quit playing because we grow old, we grow old because we quit playing.

-Oliver Wendell Holmes, 1809-1894, American Author, Wit, Poet

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The US has been generating over 49% of its electricity from coal for decades now and despite all the noise, we do not think this figure is going to change substantially soon. From 1980 to 2006, US electricity consumption has increased by 89%, which means that coal consumption increased by a similar magnitude, for the percentage of electricity generated from coal has remained somewhat steady throughout the years. The idea that solar, wind and other sources can immediately replace coal is a fallacy; it would take years for us to replace coal plants with a mixture of nuclear, solar and wind power plants. This would not address future demand and so bottom line, while coal is dirty, it is here to stay for years to come.

The two main players now are China and India; China consumes more coal now than any other country in the world; to put this in perspective, China now consumes more coal than the US and the entire European union combined. Last year, China consumed 2.62 billion tons, an increase of over 160% from 2000, when it consumed only 1 billion tons. By 2010, it is estimated that China will use approximately 3 billion tons; currently, China alone consumes roughly 1/3 of the world's total coal output.

Roughly, 70% of China’s electricity is generated from coal (1.93 trillion kilowatts), and it is still constructing roughly one new coal power plant a week. Even though China has embarked on one of the most aggressive nuclear power plants building sprees ever, when all these plants are built, they will barely supply 5% of China's total electricity needs. Thus, it’s fairly easy to assume that coal will remain a major driving force of the Chinese economy for decades to come.

India is the 6th largest generator of electricity in the world, and it’s also ranked as the 6th largest consumer worldwide. Over the past decade, consumption has increased by over 64% and its projected increase in electricity consumption of 8-10% annually is one of the highest in the world. As with China and the United States, coal provides a major portion of India’s electricity; currently, 69% of India’s electricity is generated from coal.

In 1996, India consumed 295 million tons of coal; by 2005 the figure had jumped to over 465 million tons. From 2000 to 2005, India’s coal usage increased by 5.5% a year; if we use the same projection, then in 2006 it consumed 490 million tons, in 2007 it consumed 516 million tons, in 2008 it consumed 544 million tons and by 2011 it will be consuming roughly 637 million tons; this of course is based on the assumption that consumption will continue to increase at a pace of 5.5% per annum and not spiral upwards.

The EIA projects that India and China will account for 34% of the world’s total increase in energy consumption worldwide and 85% of the world’s total projected increase in coal usage between 1995 and 2020. China and India have increased their power output by 1000% and 500% respectively since 1980, and at the rate China is going it will eventually surpass the United States. The only way it’s going to be able to increase its output in a significant way is to embrace every single source of energy out there and that includes coal.

These two countries are already operating well below optimal capacity; in fact, rolling black outs are the norm in both these countries and thus the question does not fall into the "if” category, but the "must" category when it comes to the construction of new power plants. No matter how aggressively they build new nuclear, solar, or hydroelectric plants, they will still need to continue building coal fired plants in order to meet demand, which continues to increase at a record pace.

Hence, even if by some miracle the U.S. could implement some plan in record time that would cut down the need for new coal plants, it would in no way affect long term prices because most of the world’s electricity is still derived from coal.

There are several ways to play this sector, some more rewarding than others, but the simplest way if you are bullish, would be to purchase shares in KOL, the coal ETF. As market conditions are currently far from normal, individuals should refrain from taking huge bites, but instead deploy their money in bits and pieces. Finally, one needs to take the long term view, for the short term ride is bound to be volatile.

We should not pretend to understand the world only by the intellect; we apprehend it just as much by feeling. Therefore, the judgement of the intellect is, at best, only the half of truth, as must, if it be honest, also come an understanding of its inadequacy.

-Carl Jung, 1875-1961, Swiss Psychiatrist

Disclosure: We have no positions in KOL.

Comments

[Ferdinand E...:]

The judgement of the intellect is only half of the truth. Well, when I see something like that the first thing that comes to mind is DOCTOR, HEAL THYSELF. As for the rest of doctor Jung's advice - the part about feeling- I would classify that as hippie nonsense, which suggest that the doctor is incurable.

Apart from that, this is a very good article that tells us something about coal that we need to know, and I hope that it receives a wide readership.

Feb 09 09:13 AM

[Ozarker:]

To answer that last comment--What? Anyway, what about Natural Gas and its reduced Carbon footprint as opposed to coal. Can't some of the plants be converted to Natural Gas and thus be much less polluting and meet new federal guide lines that are bound to be enforced with respect to emissions?

Feb 09 10:12 AM

[billp37:]

Coal and natural gas have the BTUs IN for large scale electricity generation. Alternate energy sources may not.

We are reading about possible electricity shortages looming.

"Thu Oct 02 01:00:00 CDT 2008 A new study released this week highlights what experts have been saying for years: the U.S. faces significant risk of power brownouts and blackouts as early as next summer that may cost tens of billions of dollars and threaten lives.

The study, "Lights Out In 2009?" warns that the U.S. "faces potentially crippling electricity brownouts and blackouts beginning in the summer of 2009, which may cost tens of billions of dollars and threaten lives." ..."

www.utilityproducts.co...

Feb 09 11:02 AM

[The Proclaimer:]

Billp37: I read the referenced article. One thought comes to mind is the possibility that cables made from conductive Carbon fibers could be one solution. They would be much lighter than conventional conductors and therefore the existing HV system towers could be utilized to to carry the additional capacity needed. That would save time and expense ( right of ways, towers, enviromental issues ect....). As I see it, economical electrically conductive carbon fibers are to be had in the near future. With more and more people, everyday, becomming believers in the the new SWAP processes it could happen in the VERY near future.

Feb 12 09:32 AM