Coal

Who knew coal-supply issues in countries far away from U.S. markets could have a massive impact on domestic supply and pricing, helping to increase prices for Appalachian coal by 260 percent in the past year? Despite what might have appeared to be an isolated U.S. coal market, recent events throughout the globe, such as supply disruptions in Australia and South Africa and increasing demand in some Asian countries, have shown that U.S. markets indeed are a major part of the global coal economy.

The outcome of the 2008 elections will determine how the nation deals with greenhouse gas emissions. With the presumptive nominees for president for both parties supporting mandatory GHG regulation, a cap-and-trade system likely will become U.S. law. How soon and how tough depends on the choices voters will make in November.

Coal faces more uncertainty than any other base-load generating source. Two new factors, hitherto irrelevant to the U.S. industry, will shape future generation investment—imports of liquefied natural gas (LNG) and greenhouse-gas (GHG) restrictions. Taken together, they point to a bleak future for coal unless its technology advances dramatically … or a political consensus fails to emerge.

When President Bush announced the FutureGen initiative halfway through his first term, industry veterans instinctively understood its purpose. Nominally a public-private partnership to build a “zero-emissions” coal-fired power plant, FutureGen stood as a symbol for the administration’s climate-change strategy. It helped the government argue mandatory carbon constraints were unnecessary, because America will develop more green technology than any other country in the world.

Coal is taking a beating. As mining costs rise, coal reserves deplete, emission regulations strengthen, and inter-fuel competitive dynamics change, the allocation of coal in the electric generation industry is certain to see substantial changes. The uncertainties over CO₂ regulations and emissions standards are having a chilling impact on both proposed and current coal investment.

Uncertainties over natural-gas prices, carbon regulation, and clean-technology alternatives are inhibiting investment in new power plants. An emissions “wargame” from Booz, Allen & Hamilton shows how companies might react to large, multidimensional changes in the generation landscape. The exercise raises strategic questions about competitive positions on the climate battlefront.

To the casual observer, the Iatan 2 power plant under construction in Platte County. Mo., is simply another coal-fired facility. However, when viewed by a utility executive facing seemingly non-stop global-warming headlines and news broadcasts, the 850 MW Iatan 2 looks more like a new regulatory and business model for building coal burners.

As U.S. policymakers consider how to tackle the challenge of greenhouse-gas constraints, the U.K.’s approach to the problem offers instructive examples.

They were heralded as “landmark” or “watershed” moments in the industry—a series of deals completed during the last few months in which utilities sat down and negotiated with environmentalists on coal-plant development. While many in the industry had hoped this was the start of a positive new trend, some environmentalists have double-dealt across state lines, arguing against coal plants in one state and then negotiating for their development in the other.

Energy producers already have begun to prepare for coming CO₂ regulations. As a first step, many companies are implementing internal trading schemes. In this article, we have focused on AEP and Southern Co. as case studies of how companies are preparing for a carbon-constrained world, because they are in the top 5 companies in the United States with the highest proportion of coal-fired generation in their fleets.