COALESCENCE
Richard Karn/Emerging Trends Report
November 1st, 2005
EXECUTIVE SUMMARY
Although the price of coal has doubled in the last year, it will remain the primary fuel utilized for electrical generation in the United States for the foreseeable future. Its abundance, low cost, and widespread availability coupled with advances in filtration and combustion efficiencies, the so-called “clean-coal technologies,” make coal a more attractive method of satisfying America’s electrical needs than other sources of power. Soaring petroleum and natural gas prices, grass root opposition to nuclear and Liquid Natural Gas (LNG) development, and the perception “Renewables” have not fulfilled their promise cement coal’s continued dominance of the electricity market. Increased demand suggests higher coal prices well into the future, making coal a solid long term investment; however, the Emerging Trends Report has identified three stand-out opportunities likely to be missed by the general public.
DETAIL: Putting US Electrical Needs in Perspective
For more than a century, coal-fired power plants have seemed to produce power and pollutants in equal measure, leading environmentalists to maintain that the term “clean coal” is an oxymoron. They certainly have a point: China, which today is the largest consumer of coal and derives 80% of its electricity from unregulated coal-fired power plants, has earned the dubious distinction of being home to at least six of the world’s ten dirtiest cities in terms of air pollution. Carbon dioxide, the greenhouse gas; sulfur dioxide, the source of acid rain; nitrogen oxide, the cause of smog and precursor to ozone; mercury, fly ash: virtually every damaging pollutant imaginable is emitted from an unregulated coal-fired power plant.
However, ‘unregulated’ is the key word in the preceding passage, and the United States is clearly not China in this regard. The United States, which consumes more electrical energy than any other country, uses coal to satisfy more than half its electrical needs but does not have one city in the top 35 worldwide in terms of air pollution, thanks to strict pollution controls and advances in clean coal technologies. Coal is by far the United States’ most abundant fossil fuel, and the cost of operating a coal-fired power plant is lower than any other method of electrical generation except nuclear, which is slightly cheaper per kilowatt hour. Improved combustion and filtration technologies have increased efficiencies at coal-fired power plants such that a ton of coal today yields up to ten times more energy than it did forty years ago while simultaneously decreasing emission levels to those more closely approximating a modern natural gas plant than a traditional coal-burning facility.
That coal-fired plants are experiencing a boom in the United States is widely recognized; how long the boom will last and how far-reaching it stands to become is not yet widely appreciated. The Energy Information Administration’s (EIA) 2003 projections for coal-fired plant construction through 2025 called for a 46% increase in output while experiencing a one percent decline in market share as natural gas-fired output surged. The Emerging Trends Report (ETR) contends high fuel costs change the equation, and the general public is as yet unaware of the extent of the boom coal will experience because of misconceptions regarding the economics, practicality and acceptance of coal’s competitors, especially natural gas- and nuclear-fired plants.
A natural gas-fired power plant has numerous advantages over the traditional coal-fired plant, three of which are germane to this discussion. A natural gas-fired plant is inherently clean: it produces negligible smoke or ash, which is its greatest appeal to environmentalists. It is also comparatively easy to get permitted and inexpensive to build, which not only brings a natural gas-fired power plant on-line sooner but also expedites a return to investors. EIA projections are for natural gas-fired plants to make up 69% of new electrical generation over the next 22 years, but their projections were based on an increase in fuel prices of not more than 38% over that span of time, and natural gas prices have already doubled. Delivered natural gas prices would have to fall from their current levels well north of $10 per Million British Thermal Units (mmBtu) to approximately $4 mmBtu to compete with existing unscrubbed coal plants-- and much lower to compete with a new Integrated Gas Combined Cycle (IGCC) coal-fired plant. Surging electrical generation costs may well prove to negatively impact natural gas-fired plant construction.
It is also important to recognize the notion of Liquefied Natural Gas (LNG) solving the supply problem conveniently overlooks two important aspects of the issue, both of which stand to further increase natural gas costs. First, to convert natural gas to LNG is an expensive process that requires special plants on each end of the supply chain and specially-built ships to transport, neither of which are helpful in lowering natural gas costs; further, the process of converting natural gas to LNG requires the addition of chemicals which create air pollution when burned, thereby smudging its clean reputation and introducing a new potential expense, filtration, to the equation. Secondly, grass root resistance to the construction of LNG terminals can be expected to generate considerable local opposition of the “not-in-my-backyard” (NIMBY) variety, especially in an environment of elevated home values representing a significant percentage of family net worth. Even if such opposition is overcome, the delay required to do so does nothing to alleviate the immediate, and accelerating, problem of high fuel costs. Ironically, the United States is estimated to have as much as 400 trillion cubic feet of natural gas, enough to supply its needs at the current rate of consumption for twenty years, but that natural gas is located in Alaska and US coastal and territorial waters not open to development, also for environmental and NIMBY reasons. This impasse seems to favor an increase in litigation rather than natural gas supply.
Electricity produced by a nuclear-powered plant is slightly cheaper than that of a coal-fired plant. The nuclear power plant construction boom that occurred in the 1970’s was directly attributable to the OPEC-instigated oil shortages: arriving as it did at the same time it was recognized that the United States had indeed arrived at Peak Oil production, nuclear energy was widely viewed as providing the energy security necessary to reduce America’s growing reliance on imported foreign oil. Obviously this scenario failed to eventuate as is witnessed by the United States today importing more oil than ever before.
There are numerous roadblocks to the construction of new nuclear power plants. Nuclear power plant construction requires the highest capital outlay and experiences the slowest permitting. Issues regarding safety and waste disposal persist to this day despite its performance record worldwide. Nightmarish cost over-runs and decade-long delays coupled with negative public opinion and NIMBY resistance have resulted in a situation in which the EIA stated in its ‘03 Annual Outlook there were only three site applications on file with none committed to construction; facility upgrades and extended licensing were expected to maintain the current number of plants in operation while slightly increasing their collective output. Although the EIA projected there would be no new nuclear plants brought on-line between publication and 2025, the ETR tends to believe skyrocketing petroleum prices will indeed spark new construction of nuclear power plants; what remains to be seen, however, is whether enough nuclear-powered plants can be permitted, constructed and brought on-line at a pace rapid enough to meet the more than 53% increase in electrical demand.
And that leaves the so-called Renewables, lead by hydroelectric, solar and wind energy, to meet the forecasted increase in electrical demand. The ETR does not believe this likely, despite higher petroleum costs making the Renewables more appealing. Hydroelectric plants make by far the largest contribution within this group to supplying the United States’ energy needs, but there are few if any rivers left to dam, and high construction costs are compounded by environmental opposition. Solar and wind power sources are making considerable strides in efficiency and total output but as a whole experience the drawback of being unable to increase their output as demand dictates. This seems to indicate that both should be considered secondary, or additive, sources rather than primary sources of electrical generation. EIA would seem to agree with this assessment as is seen by the moderate growth projected for this sector actually resulting in a decline in its contribution to overall electrical production from 9 to 8%.
The situation then, as it stands in 2005, is that utility companies face mounting problems in economically meeting the growing electrical demands of American consumers. If natural gas-fired plants are being priced out of competition, as seems to be the case at current levels; if nuclear-powered plants represent a shrinking percentage of production with new plants as much as 25 years away; and if Renewables are best considered secondary sources of power at this point, it stands to reason that coal is left to produce the lion’s share of the more than 450,000 MW of additional capacity needed to be built over the coming years. As such, an understanding of how coal will accomplish this feat is in order.
Richard Karn/Emerging Trends Report
November 1st, 2005
EMAIL:: rkarn@emergingtrendsreport.com
To request a free copy of the entire 14-page Emerging Trends Report “COALESCENCE,” including a rudimentary explanation of clean coal technology, investment recommendations, and our sources/further reading suggestions, please email rkarn@emergingtrendsreport.com.
