Coal: Inconvenient Truths

Deck: 

The current coal bust might lead to a future boom.

Fortnightly Magazine - February 2008
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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.

For example, under foreseeable prices for CO2 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 CO2 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.

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