Coal: What Happens if It Isn't Cheap and Plentiful?

| About: VanEck Vectors (KOL)

By Rob Day

Almost a year ago, I wrote about reading a National Geographic special issue on energy from 1981. So I was interested to pick up a copy of a new National Geographic special issue on energy. What's most interesting about the 2009 version is how much gloomier it is than the 1981 version. The 28 year old report reads almost like an issue of Popular Science, focusing on new technologies and potential solutions to energy supply challenges. The 2009 version talks about how we are stuck between a "played-out rock and a hard place," focusing as much on environmental challenges as supply challenges. The tone of the public conversation around energy has certainly changed over the last three decades, even if -- as the 2009 version also makes clear -- the solution set really hasn't.

The 2009 issue spends a lot of time discussing coal. For good reason. In terms of electric generation, coal is king. In the U.S., coal fired power is nearly half of the total generation mix. Globally, it's nearly a third. And in China, it's almost 70% of primary energy consumption. For decades, coal has been the primary baseload power source for many regions, because of its low cost and ready availability.

The U.S., according to reports from the Department of Energy and elsewhere, is very well-positioned to continue this pattern for many years to come -- with the 2009 National Geographic issue, for example, citing DOE coal reserves data suggesting that the US has over 200 years' worth of coal at current rates of consumption. According to the Energy Information Administration, the US has 27% of global coal reserves, followed by Russia at 17%, China at 13%, and Australia at 9%.

But for a while now, there have been signs that the era of cheap and plentiful coal might possibly be closer to ending than many people think. Coal reserves have been written down, significantly so in some case, in many regions. China is using up their reserves at a prodigious pace. And now some analysts are arguing that official coal reserve figures around the world are greatly overstated.

Here are a couple of examples: At CalTech, David Rutledge has done an analysis of coal field productivity to derive an estimated total world coal reserve of 666 billion tons, versus 3,400 billion tons as one other estimate (the IPCC's maximum extractable estimate) relying upon official reserve tallies had shown. The Energy Watch Group put out a report (.pdf) back in 2007 where they estimated that peak coal may happen by 2025, with demand growth starting to outstrip supply as early as 2020. The USGS has now scaled back their estimates of the US's economically recoverable coal.

I've already seen some dismiss this news as being too far out to be meaningful -- it's not like anyone says we're going to be bereft of coal anytime soon, after all, even under the most pessimistic analyses. But the significance of all of this isn't that we wouldn't be able to find coal anywhere. It's not about when we mine that last ounce of coal out of the ground, it's about that inflection point in pricing where coal stops being cheap. As China uses up their supplies they will need to start importing coal from regions still producing. According to the Energy Watch Group report, in terms of energy content (versus volume) US coal production already peaked earlier this decade. So accessing untapped coal reserves will be more costly in the near future, and increasing competition amongst coal consumers may drive up prices even more than that attributable to production cost increases.

So within a couple of decades, if not sooner, we may start to experience much higher coal prices, if all of these analyses are an indication. And if so, that would mean coal-fired generation would become a lot more expensive.

So what would the implications be for cleantech investors? Obviously this impacts coal-related techs, but in different ways depending upon the application. Carbon capture and sequestration would be less attractive in a high-coal-cost market, but innovations aimed at making coal-fired plants more efficient might be even more valuable, for example. Elsewhere on the generation side of energytech, alternative baseload power candidates (such as wind, wave- and hydropower, solar-plus-storage, geothermal, etc.) would be more attractive.

But the big winner would be energy efficiency technology, because electricity prices overall would rise significantly.

It will be interesting to watch the coal supply forecast debate -- and its implications for both investment theses and public policy.