Coal: ready for a comeback?

Siàƒ¢n Green

The news of new coal fired construction in North America (see Americas, Around the Globe) is a sign of a possible comeback for coal in the US power generation industry. Shunned for years due to its poor environmental performance relative to natural gas, coal fired power plants are beginning to look like a feasible prospect for new capacity build.

The USA has been hit hard by a spike in wholesale natural gas prices – December 2000 saw a quadrupling of spot prices. Natural gas is suddenly an unattractive prospect for new capacity development, and operators of existing gas fired capacity are starting to invest in the upstream natural gas sector to help manage their fuel risk.

The price spike has been caused by simple market forces, and, according to some, government energy policy. Energy consultants Cambridge Energy Research Associates (CERA) said at their annual conference, CERAWeek, held in Houston in February, that the high price of natural gas is “a storm that has been brewing for several years”. At the heart of the problem is the oil and gas price collapse of 1998, which led to a period of low upstream investment with few wells being built.

Natural gas spot prices have spiked in the USA, adding to the country’s energy policy debate
Click here to enlarge image

To add to this, two warm winters ensued, giving the energy industry a false sense of security, while the rise in new natural gas fired power generating capacity in the USA gradually hiked demand for the fuel.

Speakers at CERAWeek also blamed government energy policy for the current difficulties. J. Larry Nichols, president and CEO of Devon Energy Corp., said that the Clinton administration had failed to nurture drilling and infrastructure development, preferring instead to preserve the country’s reserves and ban offshore drilling in several regions. Drilling had also been restricted on public lands due to the environmental and visual impact, said Nichols.

The increasing reliance of the USA on natural gas to fuel its economy is causing some concern, particularly with regard to fuel diversity and security. Over 90 per cent of new power plants planned in North America are gas fired, according to CERA, and William A. Wise, president and CEO of El Paso Energy Corp., said at CERAWeek that the USA would need an additional 2.5 bcf/d each year for the next 15 years to meet its rising demand. This equates to a tripling of natural gas demand in 15 years.

In the short term, the price spike will have little impact on the power generation industry, according to Joseph Sannicandro, CERA’s director of North American Electric Power. Nevertheless, power generators such as Mirant and Calpine have taken on strategies to manage fuel risk.

Calpine is focussing its strengths on developing natural gas fired capacity in North America. Virtually all of its capacity is natural gas fired and to manage its exposure to the high prices, it has invested in the upstream natural gas sector, and now owns over 1700 bcf of reserves. It also announced in February that it has bought Encal, a Canadian oil and gas exploration company, for $1.2bn in order to lock up supplies of natural gas for power generation.

According to Marce Fuller, president and CEO of Mirant Corporation, Mirant takes a different strategy. To manage fuel risk, nearly half of Mirant’s generating assets are dual fuel, and only one quarter are natural gas fired. In addition, only one-third of the company’s income is derived from North America.

In the long term, however, the natural gas price spikes are likely to have a greater impact on the power generation industry in the US. With nuclear power unlikely to make a comeback, several speakers at CERAWeek noted that coal had once again become a viable option.

Running in coal’s favour is the fact that emission control technology is improving, making coal-fired power plants cleaner to operate. In addition, the USA has large reserves of coal (recoverable reserves of 275.1 billion short tons) and the market price is stable.

Although capital costs for the construction of coal fired plants are higher than for natural gas fired combined cycle power plants ($1200/kW compared with $600/kW), and coal fired plants take longer to permit and build, the variable costs for combined cycle power plants are higher due to fuel costs. Coal currently costs $1.0-1.5/MMbtu compared with current natural gas prices of $3-4/Mmbtu. Over 1998-1999, natural gas prices averaged just over $2/MMbtu in the USA.

Clearly North America needs to increase its levels of natural gas production in order to meet current and future demand. While drilling has increased significantly in Canada over the past year, this is not going to have an overnight impact on supplies to the USA, according to CERA.

Players in the power industry are therefore starting to take a fresh look at coal, according to Sannicandro, in spite of the potential barriers. Generators will begin to realise the benefits of having a diverse portfolio in terms of fuel, and as a result, coal could make a strong comeback within the next decade.

No posts to display