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Report Examines Fuel Trends

Fortnightly Magazine - May 15 1997

According to a new study by Resource Data International, the annual Outlook for Coal and Competing Fuels, U.S. electric load growth is accelerating, with actual utility generation growth expanding at rates comparable to the nation's real economic growth rate for the past two years.

Several electric measures suggest that in the mid-1990s, the nation is becoming more electric intensive. The 1996-1997 report suggests the nation's coal producers should see firm prices and strong demand growth in most producing regions in 1997. Conditions favoring strong coal consumption should persist through 2000. Electric deregulation, contract rollovers, sulfur-dioxide caps and other factors will result in increased coal demand.

Also, it is "virtually certain" deregulation will make electricity cheaper in the U.S. In fact, despite tightening coal supplies in some regions, delivered coal prices are expected to continue to decline over the next 10 years. RDI predicts that for the near- and mid-term, the lowest, marginal-cost, fossil-derived electric power will be available from existing coal-fired units that are not yet fully used. Productivity improvements in mining will help keep prices low, while new efficiencies and competition will keep transportation costs in check.

But a darker reality is the long-standing issue of balancing production with irregular changes in consumption. While production constraints and low stockpiles should keep eastern coal prices firm, a production capacity overhang is expected to continue to depress Powder River Basin coal prices for the next few years. Also, coal producers and transportation providers who have enjoyed lucrative margins related to long-term contractual relationships will find those profits at risk as the utility sector continues to be deregulated and as barriers to competition fall.

In natural gas, RDI finds that although natural gas consumption declined sharply in 1996 due to weather-related high prices, other factors point to strong generation growth in the next 20 years. These factors include utility capacity plans, environmental mandates and gas transmission expansion plans. Although coal-fired generation is expected to increase in most sections of the nation over the next five years, once existing coal resources are committed, natural gas technology will provide much of the new generation because of its lower capital costs, and fewer environmental constraints. (em LB

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