The winter of 2013-14 offered up a perfect storm of natural gas price spikes and threats to electric reliability. Expect more of the same.
Coal: Inconvenient Truths
The current coal bust might lead to a future boom.
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 CO 2 regulations and emissions standards are having a chilling impact on both proposed and current coal investment.
For example, under foreseeable prices for CO 2 credits ($20 and $40 a ton), mid-sized (200 MW), less efficient (11,280 Btu/kWh heat rate) coal plants lose most of their revenues (see Figure 1) . This hurts contracted assets too, because some of the older contracts either do not have any terms to cover these new emission costs or have vague language that will trigger long negotiations.
At the same time, uncertainties over CO 2 regulation and higher construction costs are driving coal plant cancellations. Total cancellations among such projects have reached 45,000 MW, and 15,000 MW more have been postponed (see Figure 2) . During the first half of 2007, out of 22,000 MW of new projects cancelled, 15,000 MW was coal capacity.
Despite these current anxieties over coal, it is too early to count coal out. In fact, the long-term fundamental analysis suggests coal will continue playing a pivotal role in the U.S. power generation sector for years to come (see Figure 3) . Overall power generation load growth is expected to increase by 1.5 percent each year, consistent with long-term trends. While natural gas is expected to account for more than half of the incremental growth in power generation, healthy competition for baseload will occur between IGCC clean coal and new nuclear.
Since 1959, the U.S. electric power generation sector has consumed more coal than any other sector. It has shown significant demand growth and increased its coal demand share from 73 percent in 1975 to 93 percent of total U.S. coal consumption in 2006, a year in which total electric power coal consumption was more than 1 billion tons. The steady increase in coal consumption by the electric generation sector shows coal’s reliability as a fuel source despite any perceived competitive disadvantages it may have.
In order to meet increasing demand, the U.S. coal-mining industry has increased its production by about 52 million tons in the past 10 years, to a total of 1.16 billion tons. During this period, the Powder River Basin (PRB) increased production by 55 percent, to 472 million tons in 2006