Is Coal the Answer to our Energy Woes?

While the sell-off in commodities may be putting near-term pressure on coal equities, some see a disconnect between these stocks and the relatively firm physical market. They cite positive fundamentals behind coal, such as infrastructure spending in China and India, which is considered a necessity regardless of a potential slowdown in the United States and Europe.

In the U.S., meanwhile, both candidates for President agree on the need to reduce the nation’s dependence on imported energy. But, as John Bridges at JPMorgan noted, they have provided little detail on how this will be achieved. T. Boone Pickens’ plan, however, does have some workable elements, the analyst told clients. It calls for more use of wind power and the application of natural gas to vehicular transport.

But, Mr. Bridges said,

If a large amount of natural gas is diverted to transport, the utility sector will need more coal.

Since coal is expensive and gas is cheap, operating margins (spark spreads) for gas-fired power generators are at a six-year high versus their coal-fired counterparts, according to FirstEnergy Capital. This has analyst Steven Paget wondering if gas-fired power could replace some of that coming from coal, which would boost gas comsumption.

He doesn’t think it will happen because both types of plants are still making solid margins at current prices. Fuel-switching capacity also looks to be limited and coal-fired capacity is still the cheapest power.

Mr. Paget said in a research note,

Higher coal prices are not necessarily affecting coal consumers, because most coal is sold according to long-term contracts, with power producers paying by cost-plus arrangements with coal producers.

He also noted that coal can be cheaply stockpiled and excess coal can be exported, neither of which applies to natural gas.

The inflexibility of the coal-fired power generation market has the analyst cautioning against using coal prices as a floor for gas, noting that if coal prices fall, “any floor would look more like a trapdoor.”

More demand for power should lead to growth in gas-fired power, the analyst said, noting that TransCanada Corp. (TRP), Northland Power Income Fund (NPIFF.PK), and Fort Chicago Energy Partners LP (FCGYF.PK) are the infrastructure names most levered to this kind of generation.

TransCanada is his “top pick” with a target price of C$48. Mr. Paget said its recent acquisition of the Ravenswood gas-fired plant in Queens, NY comes at an excellent time. It also has the capability to switch to oil.

Comments

[Paul Killinger:]

We know little about the future of coal, except that it is presently the fuel of choice for China and U.S. public utilities. That's not going to change anytime soon. Longer term, it is subject to political whims, the successful (and expensive) development of new coal technologies, and the prospects for construction of additional nuclear reactors. We'll have to check back in 30-50 years or so to know what all this means.

2008 Sep 12 11:34 AM

[NOWHEREMAN:]

What does growth in NG fired power plants do to the TBoone plan of CNG vehicle gas costs? As far as exports are concerned, ever hear of LNG?

We can build inventories of both NG and coal, in the case of NG, inventories fluctuate throughout the year and are announced weekly, usually on Thursdays. As far as coal is concerned, I don't have a clue how you would be able to find out how much has been mined and still sitting around as inventory.

Here in the US, we are trying to avoid using NG for power generation. What part of the world are you from?

2008 Sep 13 03:35 PM