Investors will figure out that coal is growing scarce and too expensive
The following is a guest essay by Tom Konrad, a financial analyst specializing in renewable energy and energy efficiency companies, a freelance writer, and a contributor to AltEnergyStocks.com.
A couple years ago, I began to see reports that coal supplies might not last the 200-plus years we’ve all been lead to believe, so I wrote an article about what you could do to prepare your portfolio for Peak Coal.
Now two years have passed, and peak coal is undeniably two years closer. (Ever wonder why people who have been saying that we have 200 years of coal for 20 years aren’t now talking about 180 years of coal?) But more than being two years closer, the evidence continues to mount. Caltech Professor David Rutledge has been spreading the peak coal word for most of the time since. I recommend the video of his 2007 lecture on the subject.
It’s great that the New York Times is asking “Is America Ready to Quit Coal?” but the real question may be “Will we have any choice?”
On February 12, Clean Energy Action released a report on Powder River Basin coal supplies, based in part on a 2008 U.S. Geological Survey report. The Powder River Basin matters because Western coal has been the only source of new coal production in the U.S. for the last two decades. Appalachian and interior coal production has been declining, despite mostly increasing prices and uniformly increasing prices since 2003. Northern Appalachian coal production peaked in the middle of the last century, while interior coal production peaked at the start of this decade. When production declines in the face of rising prices, constraints other than economics must be coming into play. Future increases in production in these regions seems unlikely.
Of the top six coal producing states in the U.S., only Wyoming and Montana are still increasing production. West Virginia, Kentucky, Pennsylvania, and Texas all peaked in the 1900s. With existing Wyoming mines, which dominate current production, having less than 20 years of reserves remaining, only Montana will remain … and we simply don’t know enough about the geology to know how much can be recovered. Jim Hansen, author of the Master Resource Report (not the NASA guy), tells me that available rail supply lines out of Montana are likely to be another critical limiting factor on that state’s production.
The 2007 report from Energy Watch Group (which triggered my earlier article), David Rutledge, and Clean Energy Action all found that what we don’t know about our coal reserves far outweighs what we do know. What we do know should be very worrying to anyone who hopes we might be able to replace our current coal-fired electricity generation with any sort of “clean coal.” Any attempt to sequester CO2 by pumping it underground or to the bottom of the sea would require considerably more energy than simply releasing it into the atmosphere, as we do now. That energy would come at a cost of less net energy from what will likely prove to be very limited coal supplies.
Peak coal accounting
If “clean coal” can be made to work, and we are able to replace part of our electricity supply with this technology, it seems increasingly unlikely that we will be able to supply as much electricity from coal 30 years from now as we do today. Coal plants are intended as 50 to 60 year investments, and part of the reason they are considered so “cheap” is that the construction costs are depreciated over more than half a century of payments. If in reality those construction costs must be paid over a shorter period, the effective cost of coal-fired electricity will be considerably higher … even if the accounts do not yet show it.
Transitioning away from coal now makes sense both from an economic and climatic standpoint. If new coal plants will have shorter than expected useful lives simply because of the limited supply of coal, an honest accounting cannot spread construction costs 60 years, as has been done in the past. A shorter useful life means significantly raising the accounting cost of coal power per kWh, even before we place any price on carbon emissions or other environmental damage.
Carbon capture and storage
That is not to say that improving carbon capture and sequestration technology will not be useful. Even without building new coal plants, we already have a massive fleet of coal plants spewing carbon into the atmosphere. According to a recent Inside Renewable Energy podcast, French utility EON puts current carbon capture technology costs about $40 per ton of CO2, and they hope to get the cost down to $20. This does not include the cost of pressurizing the gas and injecting it into some form of permanent storage. (Even permanent storage may not be so permanent.) Capturing CO2 for industrial uses can make economic sense today, and the economics will only get better when we begin to have reasonable prices for carbon emission. However, cleaning up the emissions of currently built fossil-fueled generation is not the same as investing money in new generation which we hope to clean up later.
We have the technologies today to begin this transition, and other promising technologies at least as near to development as “clean coal.” Wind power is nearly as cheap as coal with current accounting. If we reassess the useful lives of prospective new coal plants and put a price on carbon emissions, it will be much cheaper.
Building out the smart grid and additional transmission capacity will allow us to integrate much more wind than skeptics currently think is possible. A recent report from researchers at the Rocky Mountain Institute and the University of Colorado Boulder found that optimized diversified portfolios in the Midwest of wind and solar generation were 55 percent more reliable (measured by the variability of output) than the average individual site used in the study. For large scale baseload and dispatchable generation, concentrating solar power needs only the continued price improvement that will come from mass deployment and a more robust national grid. For large-scale clean baseload power anywhere in the U.S., enhanced geothermal systems are likely to be easier and cheaper to develop than “clean coal.”
All of these are the right investments for the country, but they are also likely to be good moves for
investors. We may still have 30 years before coal production in the U.S. peaks. The stock market reaction will not wait until the actual peak … the stock market reaction will happen when sufficiently many investors realize it’s coming.
How many more reports will that take, I wonder?