Seeking Alpha
Profile| Send Message|
( followers)

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 (NYSEARCA:KOL)


Largest US Coal Company (NYSE:BTU)


US Coal Production Limited Partnership (NYSE:NRP)


Large Chinese Coal Producer


South Africa Coal Synfuel Company (NYSE:SSL)


Disclosure: We own NRP.

Source: Electric Utilities: Coal vs. Renewables