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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The War On Coal Is Over

Coal

The war on coal has ended. Not because the U.S. exempted itself from the Paris Climate Accord, nor because President Obama no longer sits in the Oval Office. "King Coal" lost the so-called war for a sim-ple economic reason: it's cheaper to make electricity with domestically produced natural gas.

Back in 2008, with the economy in shambles and Obama just elected, natural gas prices set record high levels. No electricity producer should have wanted to burn gas. Coal should have had the market for generation locked up. Coal prices were steady and supplies plentiful while natural gas prices were rela-tively high and quite volatile.

But as gas prices plunged, inefficient gas drillers went under and the survivors developed more effi-cient ways to extract their product. They learned to operate and even expand at prices previously con-sidered too low for profitable operation. The coal mining industry had no comparable technological "epiphany". Bankruptcies followed. But apart from financial reorganization not much else in the coal industry has changed.

From 2008 to 2016, the price of coal per million BTU delivered to electricity generators rose 2.4 percent versus a 68 percent drop for natural gas. (See Figure 1.) In the same period, the fuel cost per kwh of electricity generated fell 5 percent for coal and 75 percent for natural gas. (See Figure 2.) At present, the fuel costs per kwh generated for coal and natural gas are almost equal. Related: Aramco Aims To Take Over The Offshore Rig Market

Figure 1. Fuel cost delivered to electric generators (¢ per MM BTU).

(Click to enlarge)

FIgure 2. Fuel cost per kwh generated (¢).

(Click to enlarge)

There are no guarantees of future prices, of course. Maybe coal mining companies will stumble onto a breakthrough technology that dramatically reduces costs. Or perhaps gas prices will again rise sharply as the U.S. producers find new export markets to soak up the gas glut. That is why fuel purchasers need to hedge their bets.

However, according to the U.S. Energy Information Administration's analyses and projections for pow-er plants going into service in the early 2020s, total cost of new clean coal-fired generation (on a per kwh basis) might be double that of natural gas fired electric power generation. A conventional coal plant’s carbon capture might "only" cost 50 percent more.

Fuel, we estimate, would account for roughly 15 percent of the cost of new coal generation and 30 percent for gas fired generation. Thus, the price of natural gas would have to multiply several times to make gas fired generation less attractive than coal, if the EIA has its numbers right.

Only offshore wind and solar thermal would cost more. But they have other attractive features such as extremely low operating cost.

Perhaps skeptical investors in new electric generating plant may not want to rely solely on EIA num-bers to make a major capital allocation decision. But let us face facts. The EIA gets its information from the same places as the generators. And right or wrong, its numbers reflect the data that will go into the decisions.

Related: OPEC Cuts Send Russia’s Oil Heartland Into Decline

So, for the present, the expense of natural gas versus coal as a boiler fuel is roughly similar. But it costs more to build and maintain a coal-fired power station, that is, it entails higher capital costs. So why rely on coal to produce a commodity product, electricity, in an industry where increasing competition is a fact of life? (Unless you have psychically derived information about the direction of fuel prices — and try selling that to a bank when you seek financing!)

Based on current cost information, without attributing malicious intent toward the coal industry on the part of the Obama administration, and with or without U.S. membership in the Paris Climate Accord, it looks uneconomic and therefore highly unlikely that anyone would build new coal-fired plants in the near future.

The best outcome the domestic coal industry can expect from the Trump administration, short of di-rect subsidies, is a slower decline in the retirement rate of aging coal-fired power stations.

But natural gas might not stay on top for long, either. Falling renewable energy costs should see to that.

By Leonard S. Hyman and William I. Tilles

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Leave a comment
  • Oilracle on June 05 2017 said:
    ---Falling renewable energy costs should see to that.---

    Right!
    Each day by the night time the solar energy cost falls to $0.00!
  • Dan on June 06 2017 said:
    Listening to President Trump explain the Paris Accord still gives coal a boost as it the rest of the world that is still building coal plants. Which would nullify the apparent reason for the Accord on it's own if we used logic. The restrictions were just for us.

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