Fossil Fuel investments are DOOMEDPosted By Peter
Date Wednesday, 21 November 2018, at 12:23 a.m.
There are three major categories of fossil fuels: coal, oil, and natural gas. I discussed oil first, with a detour to electricity, and now we’re on coal. Coming up next: natural gas, and finally a section on the fate of utilities. I will go through pricing calculations and comparisons to demonstrate that the alternatives to coal, oil, and gas are either already cheaper or guaranteed to be cheaper within the next 2 years for a sufficiently large percentage of consumers to cause huge drops in fossil fuel demand over the next 10 years.
The History of Coal
Coal is used in significant quantity for only two things: electrical generation and steelmaking. These require different grades of coal, known as “thermal coal” and “metallurgical coal.”
Coal used to be used for heating and cooking but basically isn’t anymore.
Originally, anthracite – high-quality hard mineral coal – was preferred and used for everything, both heating, and steel. It burned pretty cleanly. It could be used directly in steel mills. However, all the cheap, easy-to-get anthracite was dug up and burned.
Eventually, anthracite got too expensive to compete on the market. Steel mills switched to using coke, which was made by converting lower-grade “metallurgical” coal in a special furnace (a dirty process, but cheaper than the now-very-expensive anthracite). Other users switched to bituminous, sub-bituminous, or lignite coal. “Peak anthracite” happened around 1910. You can still buy it in tiny quantities at high prices for home coal-burning stoves in some rural areas, but it’s not a significant business.
Coal for heating and cooking was replaced due to the enormous local pollution it caused, in stages from the 1920s through the 1970s; initially replaced by oil, then by natural gas, and finally by electricity. It’s basically gone.
Coal for electricity is now too expensive to compete and is being replaced, first by natural gas and then by wind and solar power. New-build coal plants are already too expensive and nobody is building any.
The Empirical Evidence
This should be obvious by now. Anyone who was invested in coal has already lost large amounts of money. It is too late to get out of coal stocks at a good price.
All of the largest coal companies in the US (Peabody, Arch, Alpha, Patriot, and Walter) have declared bankruptcy, some of them twice. The coal companies which haven’t declared bankruptcy are penny stocks.
One of the biggest coal conglomerates in India, Adani, has stopped opening new coal mines and is putting money into solar panels.
Coal power plants are closing for purely economic reasons. Frequently. The shutdown of Hazelwood in Australia is a case in point.
China has ordered many of its mines to shut down due to a glut of coal and has ordered many of its coal power plants to shut down too.
Metallurgical coal is a much smaller market than thermal coal. It is used in huge quantities in the classic steel mills, which use descendants of the Bessemer process to make steel from raw ore. These use coal for control of the carbon in the steel, and also for heating the ore and the iron.
However, it is much cheaper to make steel from recycled steel and iron in so-called “mini-mills” that use electric arc furnaces. These still use some metallurgical coal, but not nearly as much; they only use the coal for its chemical function to control carbon in the steel, and do the heating with electricity. They are the only mills used for steel recycling.
In recent years, the electric arc furnace method has been advanced and is used on raw iron ore.
Demand for metallurgical coal collapsed last year when the Chinese construction industry took a downturn, and this was the last straw which caused the bankruptcies of most of the oil companies.
There is no replacement for metallurgical coal, but it is going to be a very tiny market. Until almost all the coal mines in the world have shut down, there will be gluts and it will be a money-losing business.
Price of Thermal Coal
Lazard estimates the levelized price of new-build coal-burning plants to be at least 6 cents per kWh (that’s the low end of their range). As noted before, renewable electricity can now be produced more cheaply than this, and that won’t change. (It is also cheaper to produce electricity from natural gas right now, though that might change.)
This means that nobody will ever build a new coal-burning plant again, at least not profitably — the cost of other forms of electricity is consistently cheaper already. This means that the market for thermal coal can only shrink.
The price of operating an existing fully depreciated and paid off the coal-burning plant is lower. It is composed of two major elements: the cost of the coal, and the cost of transporting it.
In Appalachia, where all the easy coal was mined long ago, the coal costs $45–50/ton. This translates to 2.34 to 2.6 cents per kWh using EIA 2014 assumptions for the average thermal efficiency of coal power plants.
Some of the other basins have cheaper coal. The Illinois Basin is only $34.50/ton. The Uinta Basin in Utah is $40.90/ton, but it’s also further from most of the power plants and people, so the transportation costs are higher. The Powder River Basin, which is even further from the power plants and people, is only $11/ton.
However, it is very expensive to transport coal, because you are hauling rocks long distances. Accordingly, coal power plants which are far from the nearest mine have found that the coal cost at the power plant is too high to compete, even if the coal cost at the Minehead is so low that the mining company is going bankrupt. It never makes sense to haul coal from an extremely distant basin.
Coal power plants which are not located near mines have been closing very, very fast.
Coal transportation costs from Appalachia to the closest market in 2014 ran about $11.58/ton, which translates to 0.6 cents per kWh (again, assuming a highly efficient power plant). This gives a fuel-price of at least 2.94 cents / kWh at the power plant. By contrast, transportation to the most distant market is $38.98 per ton as of 2014, which is 2.06 cents per kWh, giving a fuel price of 4.4 cents / kWh at the power plant. (Source: EIA)
A thermal power plant has employees and so forth. They always have a cost of operations of at least 1 cent/kWh, and if you add it up, wind power is often cheaper than operating existing coal plants.
These transportation numbers are already out of date. Railroads have been raising their rates for two reasons:
- Coal can’t really be transported by truck for more than short distances, so the coal mines are captive customers, except in the rare case where they can use barges.
- Mainline railroad tracks have limited capacity. Using the same mainline tracks, they can either run a coal train or an intermodal merchandise train, and the intermodal trains are much more profitable. So they raise the coal train prices to discourage coal customers, so that they can put more of the more profitable intermodal trains on the route.
So, economics for existing coal depends very much on where it’s located. But most of the basins are either played out and expensive to produce, or remote and expensive to transport. There are some exceptional plants with their own mines next door which may last longer, but that’s it.
Existing thermal coal power plants – even if they’re next door to a mine — also face the problem that they’re old – very old – and they don’t last forever. Eventually, they have to have retrofits. At which point the price is like a new coal plant, which we know can’t compete. Hazelwood in Australia is an example of a plant with its own mine which is closing.
Policy Regarding Coal
Both India and China have choking smog and have instituted policies to reduce coal burning. Coal burning is also very unpopular pretty much everywhere due to local smog. Even the plants next door to the coal mines may be closed because of this, particularly if they are old and might need extensive retrofits.
The survivors of the wave of bankruptcies in coal will continue to face an impossible economic situation. Renewables and gas will set a price cap on the price which can be received at the power plant. After subtracting the cost of operations of the power plant and the growing cost of coal transportation, this will set a rather lower cap on the price the coal mine can receive. The shrinking market will mean repeated gluts of coal, which will cause the actual spot price to be even lower.
This price is likely to often be lower than the cost of production at the coal mine, which rises every year. Any local objections to the smog will only reduce demand further.
- Previous: Fossil fuel investments are DOOMED. Part 1: A data-rich analysis of the oil market.
- Next: Fossil fuel investments are DOOMED. Part 3: A data-rich analysis of the natural gas market.
- And finally : Fossil Fuel investments are DOOMED. Part 4: A data-rich analysis of the utility market
(Originally appeared at our sister-site, Cleantechnica.)