Energy Investing: The Developed and Developing Coal Markets - dummies

Energy Investing: The Developed and Developing Coal Markets

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

Energy investors need to understand that coal has two markets — the developed market represented by the United States and the developing market represented by India and China.

Burning coal in the United States is responsible for 37 percent of the country’s total carbon dioxide emissions. The use of coal is being gradually reduced both due to the low cost of natural gas — now abundant due to fracking — and measures taken by the EPA in response to President Obama’s efforts to clean the environment.

Due to the regulatory cost of clean coal, the last coal-fired power plant in the United States has probably been built. Natural gas in America has undercut coal’s natural advantages. That is, natural gas is now abundant and cheap, and it has the added benefit of burning much cleaner than coal.

As you can see in the following table, the projected cost of advanced coal with clean coal technology, or carbon capture and sequestration (CCS), will soon eclipse the cost of using natural gas.

Utilities use the levelized cost of electricity generation, or the price they must charge to break even after all costs and depreciation are accounted for, to determine which types of energy assets to acquire. This number is reported in dollars per megawatt-hour, which can also be broken down into cents per kilowatt-hour.

Utilities look for the source with the lowest levelized cost that meets all their emissions and generation requirements. Coal is competitive on its own but becomes prohibitively expensive when you start adding clean-coal technology.

Estimated Cost of New Generation Resources, 2017
Plant Type Total System Levelized Cost ($/MWh)
Natural gas advanced combined cycle 65.5
Natural gas conventional combined cycle 68.6
Hydro 89.9
Natural gas advanced CC with CCS 92.8
Wind 96.8
Conventional coal 99.6
Geothermal 99.6
Natural gas advanced combustion turbine 105.3
Advanced coal 112.2
Advanced nuclear 112.7
Biomass 120.2
Natural gas conventional combustion turbine 132.0
Advanced coal with CCS 140.7
Solar PV 156.9
Solar thermal 251.0
Wind — offshore 330.6

Despite the consumption drop in the United States, coal consumption globally is going up. Coal has significant advantages for the developing world, which is why it’s the most-used fuel for electricity production.

Over the last three decades, the amount of electricity produced from coal has grown more than 200 percent worldwide. China alone is adding an average of two coal-fired power plants per week. These additions put staggering stress on the environment.

During the 2008 Beijing Olympics, the air was so bad that some runners refused to compete. China now burns 3.8 billion tons of coal each year, almost as much as the rest of the world combined. China’s CO2 emissions rose by 9.3 percent in 2011 to 720 million tons. Pollution and dust generated in China are causing smog in Japan and have been found as far away as California.

In January 2013, the index for fine particle pollution rose to 1,000 micrograms per cubic meter — or 40 times what the World Health Organization says is safe. It was literately off the chart. An estimated 750,000 people die in China each year as a result of air pollution. This table shows global CO2 emissions by country.

China’s reason for not signing the Kyoto Protocol, which is the United Nations’ treaty to reduce global emissions, was that its emissions were much lower per capita than developed nations. That’s true, but it’s also a red herring.

Though the United States has more than twice the per-capita carbon emissions as China, total U.S. emissions are about half of China’s. Both per capita and total emissions figures are important, but you must also consider geographic and demographic factors. China’s coal plants are closer to more densely populated cities, so their problems are exacerbated.

CO2 Emissions by Country
Country CO2 Emissions (Thousand Tonnes) Emissions per Capita (Tonnes)
China 9,700,000 7.2
United States 5,420,000 17
India 1,970,000 1.6
Russia 1,830,000 12.8
Japan 1,240,000 9.8
Germany 810,000 9.9
South Korea 610,000 12.6
Canada 560,000 16.2

No one wants to live with horrific air pollution, and the recent conditions have forced Chinese leadership to talk up plans to cut pollution. They already have strict targets in their five-year plan to cut air pollution in major cities by 40 to 50 percent by 2016.

It seems unlikely that China will meet these goals because 70 percent of its electricity still comes from coal. Something has to give. It’s a good bet that China will embrace the use of clean coal technology.