Electric Utilities: Coal vs. Renewables

Kiplinger’s reports that there is legislation in the works that would mandate 25% of US electricity to be generated through renewable fuels by 2025. Should that become law, the implications for coal are not good.

The heavy clean coal TV advertising shows that the industry recognizes it is a political target.

Weekly Spot Coal Prices:

click images to enlarge

Coal Use in the United States:

Currently approximately 1/2 of US electricity is generated from coal, and 93% of coal use in the US is for electricity. As the largest source of fuel for power generation, and with substantial environmental issues, coal may be the fuel most effected by the potential legislation.

The 2008 mix of energy sources for electricity in the US was:

• Coal: 48.5%
• Natural Gas: 21.3%
• Nuclear: 19.7%
• Petroleum: 0.8%
• Conventional Hydro (renewable): 6.1%
• Other renewables: 3.0%
• All other: 0.7%

Impact Calculations:

If we assume that nuclear is not as likely to be taken off-line as coal, and if we assume that natural gas poses fewer environmental challenges and does not have as many image problems as coal, then we might assume that most of the renewable substitution would be for coal. That logic would translate to an approximate 1/3 decrease in coal demand at the current level of electrical power usage.

Of course, if we all begin driving electric cars, a lower percentage of coal with massively increased electricity consumption might result in increased coal demand.

Extracted components of coal are used in manufacture of plastics and some other synthetic materials. There may be a larger future for coal in that arena, but the percentage effect on reductions in coal use for power would likely be small.

Energy Information Agency Projection:

The Energy Information Agency projects more than 1/2 of new power plants through 2030 to be natural gas fueled, and only 18% of new plants to be coal fired.

Legislation:

That EIA projection may not have factored the particular renewable fuels legislative drive referenced by Kiplinger’s.

The legislation may or may not have taken into consideration the collateral consequences of renewable fuels on other markets, such as the distortions in corn prices that we experienced during the recent ethanol boom. And, the legislation may or may not have taken into full consideration the evolving technologies to utilize coal in a more environmental friendly way.

As always, there will be new winners and new losers in the energy related world as the government changes the rules of the game. Investors need to look into their crystal balls to find the likely consequences. We are in a period of time on many economic and industrial fronts where central government planning, government funding and new regulation will increasingly determine the name of the game, the rules of the game, and which players are on and off the field.

Old assumptions must be carefully assessed versus the new and evolving realities. There has always been change, and sometimes rapid disruptive change, but seldom so subject to arbitrary decisions of government versus organic forces of the market.

Foreign Coal Demand:

The US, Russia and China have the world’s largest reserves of coal, which in the US would last perhaps 200 years at current consumption rates.

The price of coal may experience downward pressure due to environment related forces in the US and other developed economies, and may experience upward pressure due to lower environmental pressures and increasing demographic and general industrial growth in developing economies.

That may make it reasonable from an investment perspective to evaluate owning coal companies in countries less concerned about coal’s problems, or that intend to improve the environmental performance of coal as opposed to moving away from it.

Charts:

Dow Jones Coal Producers Index

Coal Producers ETF (KOL)

Largest US Coal Company (BTU)

US Coal Production Limited Partnership (NRP)

Large Chinese Coal Producer

South Africa Coal Synfuel Company (SSL)

Disclosure: We own NRP.

Comments

[epeon:]

Passing a mandate is congress' chicken shit way of passing a tax increase without suffering the political consequences of doing so. The net result would be a substantial increase in the cost of electricity, but the person paying the freight won't necessarily know that the increase is due to this mandate and not inevitable.

Apr 13 08:19 AM

[john s. gordon:]

legislators vote for a mandate in order to create the illusion that 'something is being done about a problem'.
> jack

Apr 13 08:40 AM

[Obamitall:]

So the answer for an investor would be to buy into Chinese energy. They certainly would be happy to buy our cheap coal with all those bonds and dollars that they hold.
And they have a pragmatic approach to the problem of energy policy, not a "sky is falling" due to global warming events that may or may not be mankind's fault.

Apr 13 08:55 AM

[billp37:]

"[w]hich in the US would last perhaps 200 years at current consumption rates."

"[A]ccording to a recent USGS study (Assessment of Coal Geology, Resources and Reserves in the Gillette Coalfield, Powder River Basin, Wyoming, USGS open-file report 2008-1202), the coal reserve estimate for the Gillette coal field is 10.1 billion short tons, which is a mere 5% of the original 200 billion ton resource total. In other words, the USGS has just revised the Gillette resource base down by 95%."

pubs.usgs.gov/of/2008/.../

Apr 13 09:05 AM

[captainccs:]

If coal reserves are calculated the same as proven oil reserves, they go up and down with price. The proven oil reserve is the amount of oil that can be economically recovered at current prices. As the price goes up you can economically recover more oil.

Whether the mandate is the best way to do it or not, alternate energy needs encouraging because we need to move from fossil fuels to renewable over the next 25 to 50 years.

Apr 13 09:38 AM

[Ferdinand E...:]

There was an article about the global supply of coal in a recent issue of 'Science'. Among other things they quoted an estimate of a colleague at my university that coal production will be peaking well before mid-century - which I don't believe for reasons that I won't go into - and they discussed research at California Institute of Technology which concluded that peaking will take place before the end of this century,

Some years - or maybe centuries ago - I used some elementary calculus to show that a conventional reserve-production ratio was not very helpful if global coal consumption grew at a 3-4%/y rate. Unfortunately, however, this was a little too simplistic, because employing the kind of logic that is relevant to peaking of global oil, a 3-4%/y rate of grown of consumption makes it likely that a coal peak will appear well before the turn of the century.

Apr 13 09:56 AM

[johnmorrison9:]

Coal scares me because of the Democrats.
It reminds me when the Progressives warned women not to breast feed, the next ice age, and horrible impact the insignificant man has to the earth. We better not use what we have, God knows it may be there for us.

Apr 13 01:45 PM

[john s. gordon:]

obamit - china's coal resources are ample, but if they buy it from overseas at all it's more likely from australia or british columbia.
when i was in china they were not particularly concerned about global climate change, but their air-pollution problem is horrendous. after cleaning that up they can tackle their polluted water resources.
> jack

Apr 13 02:22 PM

[fran:]

has anyone performed the numeration[simple arithmetic] regards the most likely way to achieve the stated goal[25%renewable by 2025]?
though it is abnormal for our legislators to worry about practicality in such matters, in our current economic state[bankrupt,heading for high inflation, eroding dollar, decaying infrastructure, etc] it would be prudent to know that such objective is at all practical. the first fallacy foisted on the public was the goal to double renewables within the four years of Obama administration[along with the five million jobs]. anyone heard how that will happen, let alone 25% by 2025[that is 15 years hence].

anybody in DC ever heard affordability or doability or practicality? California started down this same path several years back. see where they are now, given the practicality of economics and real life.

Apr 13 06:13 PM

[basehitz:]

I heard then candidate Obama in an interview state (paraphrased) "I would not ban use of coal, but will tax it so heavily as to bankrupt anyone who tried." So whatever Congress comes up with, coal is in trouble.

But then again:
we can't drill offshore or in ANWAR because of the environment.
we can't expand nuclear because our facility built in Nevada for waste storage can't be used per Harry Reid.
we can't do wind farms cause we might piss off some bird, or cause Ted Kennedy thinks they're an eye sore.

No, instead lets just keep up with the massive wealth transfer from the US to those countries (which seem to be everyone but us) that exploit the resources they have. We seem to be determined to destroy ourselves.

Apr 14 08:53 AM

[rbstiles:]

That bunch in DC have no a clue as to how an electrical grid works. I am surprised that they haven't proposed that everyone plant current bushes and just plug into them. Bottom-line you can't generate base load power (that power that has to ALWAYS be there) with wind, solar, etc. The foundation of the electrical grid(s) is base load generation (nuclear, hydro, coal, natural gas), that is power that is available with the wind doesn't blow and the sun doesn't shine.

Apr 14 12:37 PM