Public utility stocks showed no signs of letting up during the fourth quarter of 1995. The Public Utilities Stock Index rallied a brisk 234.66 points, or 6.38 percent, to close at 3910.01. Not to...
The Economics and Politics of Western Coal
Wyoming and Montana
are cracking Midwest coal markets,
despite local protectionism.
As pressures build steadily toward deregulation and increased competition between electric power generators, Western low-sulfur coal is emerging as the most economical fuel option for an increasing number of companies. The low cost of delivered fuel and avoidance of capital outlays offer attractive savings. But more than that, Western coal can also provide a competitive edge.
Today, Wyoming has assumed the title of the nation's leading coal-producing state, having displaced West Virginia from second place in 1984, and Kentucky as the leader in 1988. Since the late 1980s, Wyoming and its neighbor, Montana (em which together form the Powder River Basin (PRB) region (em have come to challenge the Appalachian states for the title of "King Coal." Of the nation's 91 billion tons of low-sulfur coal reserves, 86 percent lie in the West. Given current consumption of low-sulfur coal (em about 300 million tons a year (em Wyoming and Montana could supply all the nation's requirements for 200 years. In fact, by year-end 1994, PRB coal generated approximately 20 percent of the coal-fired, steam-generated electricity in the United States.
This shift of coal production from East to West carries both short- and long-term implications for coal producers, coal transporters, and electric utilities (em in both the economics and the politics of competition.
Clean Air Strategies
The production increases seen in Western coal production gained momentum from the 1990 Clean Air Act Amendments (CAAA), which require utilities to reduce their sulfur dioxide (SO2) emissions. to 2.5 lbs/MMBtu by January 1, 1995, and to 1.2 lbs/MMBtu by January 1, 2000. PRB coal carries between one-half and one-sixth the sulfur content of most Interior or Appalachian coals. Additional pluses for PRB coal come from abundant reserves, infrastructure development, and low-cost
production and distribution economics.
The CAAA moved away from the concept of command and control for SO2 emissions. It allowed utilities to exercise freedom of choice to pursue the most efficient compliance option. Nevertheless, political concerns have prevailed periodically over economic factors, often at ratepayer expense,
clouding the economics of the various clean air options:
Scrubbers. Although investment in scrubbing has not lived up to expectations, some utilities have chosen this route to CAAA compliance. Unfortunately, scrubbers almost never provide the right economic answer. Not only do they average $100 million to purchase and install, they increase a utility's cost of generation.
U.S. average scrubber retrofit costs run to $244,000 per megawatt, according to the Utility Data Institute. For a 500-megawatt (Mw) plant, a scrubber's capital cost would reach $122 million. Amortizing this capital addition over 20 years at 10-percent interest works out to $14 million annually (em approximately $5 per megawatt-hour (Mwh) for a plant operating at a 65-percent capacity factor. The national average operation and maintenance cost for a scrubber is $1.42/Mwh. Thus, using a scrubber can increase the cost of power generation by 20 to 25 percent. These costs inevitably lead to higher prices or heightened risk for ratepayers, or unnecessary costs for shareholders, as well as making it more difficult