News of Coal's Demise Could Prove Premature
Despite recent announcements by the Environmental Protection Agency to place additional restraints on power plant emissions, coal continues to dominate electric fuels markets. Though some fear new EPA standards could pressure marginal coal plants to close, it is unlikely this will happen. Coal markets are propped up by a marked decrease in contract prices, cleaner mining, productivity gains, troubled nuclear power and instability in gas and oil prices. Through the first quarter of 1997, coal accounted for nearly 58 percent of the electric output by utilities (em up from 56.5 percent in 1996 and 55.2 percent in 1995.
Contract coal prices have declined steadily since early 1991 (see Chart 1). More than 80 percent of all coal delivered to electric power plants is under long-term contract (em about 700 million tons annually. Lower prices primarily are driven by the roll-over of high-priced contracts signed in the late '70s and early '80s. Contracts will continue to expire in the future.
In addition, the overall quality of coal delivered under contract has improved markedly during the past five years. Since 1991, the quality of contract coal has improved by more than 20 percent (em down from 2.5 lbs SO2/mmBtu to 2.1 lbs SO2/mmBtu in 1997 (em due to increased demand for low-sulfur western coal, particularly from the Powder River Basin in Wyoming. Since 1990, coal deliveries from the PRB have increased by nearly 100 million tons annually. During that same period, coal demand by electric utilities in the U.S. increased by only 72 million tons annually. This increase in cleaner coal will continue with the start of Phase 2 of the Clean Air Act at the end of 1999.
Instability in natural gas and residual oil prices during recent months has driven a demand increase for coal. In early 1997, delivered gas prices were averaging more than $0.350/mmBtu, peaking in January at $0.403/mmBtu (em the highest monthly average since the early '80s. During the same period, coal reached a 15-year low of $0.127/mmBtu. The difference was a remarkable $0.276/mmBtu.
Decreasing output from nuclear power plants in early 1997 after two consecutive years of high generation added to coal's surge in popularity. Through March, nuclear output was lagging 14,000 gigawatt hours behind 1996; coal gained 7,000 GWh during the same period. An estimated 11,000 MWs of nuclear operating capacity is earmarked for early retirement by 2010.
PacifiCorp's proposed acquisition of Peabody Holding Co. marks the first significant electric and coal merger. Most energy company mergers have occurred between electric and gas companies. PacifiCorp could work cost-saving deals with Peabody's customers to generate surplus low-cost coal power from under-utilized plants. The fuel supplier and the generating company could share additional output and profits and would spread the risk. t
Kent Knutson is senior vice president of Resorce Data International Inc., an energy industry consulting and information management firm.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.