Europe is burning more American coal

Michael Giberson

Natural gas production is booming in the United States. The resulting low natural gas prices are helping the fuel displace other energy sources, most particularly the use of coal to produce electric power. As U.S. demand for coal falls, so has its price and as a result international coal buyers are increasingly turning to U.S. suppliers. One big buyer: Europe.

Ironies abound in this Washington Post report on growing European use of coal. The EU has elaborate and costly greenhouse gas regulations while the U.S. has failed to implement any systematic federal greenhouse gas policies. European nations like Germany, Spain, and Denmark are frequently cited as models for their support of renewable energy. And, with these policies in place, greenhouse gas emissions are falling in the United States and Europe is burning more coal. Apparently good intentions are not enough. The Wall Street Journal had a similar report yesterday: “U.S. Coal Finds Warm Embrace Overseas.”

One more point: All that “good news” about reductions in U.S. greenhouse gas emissions is mitigated a bit by tracing through the economic logic. We’ve displaced some coal consumption by increased gas consumption, but much of that coal is simply being burned in Europe or China or elsewhere. U.S. coal production has been relatively flat for two decades, but U.S. coal exports have doubled since the 2006. (See EIA data here.) So we’re cutting emissions, but there will be essentially no climate change pay-off from the cuts. This same consequence would have arisen had the U.S. shifted from coal to natural gas because of carbon taxes or an effective U.S. cap-and-trade scheme (except in that scenario we pay more for energy rather than less. Technological improvements rule!).

Coal company to EPA: Regulate me, please

Michael Giberson

It looks like a “man bites dog” headline in the New York Times: “A Coal-Fired Plant That Is Eager for U.S. Rules.”

As operators of coal-fired power plants around the country welcome a court-ordered delay on tighter pollution rules, the owner of a retrofitted plant here says that the rules cannot come too soon.

The company, Constellation Energy, says it is an issue of fairness. A little more than two years ago, it completed an $885 million installation that has vastly reduced emissions from two giant coal-burning units at its Brandon Shores plant here, within view of the city’s downtown office towers.

But the slightest effort at reading between the lines reveals that profits, not fairness, are motivating Constellation’s embrace of federal environmental regulations. (Not that there is anything wrong with that.)

The story is pretty simple, and most of the pieces are explained in Matthew Wald’s Times article:

  • A few years ago the state of Maryland passed stricter environmental rules that induced Constellation to spend $885 million on additional pollution control equipment;
  • That spending puts Constellation at a disadvantage relative to other coal-fired power plants competing in the regional power market;
  • The federal rule wouldn’t impose additional costs on Constellation, but would impose costs on its competitors; some competitors will shut down older plants rather than retrofit;
  • A federal regulation will produce slightly higher power prices but no additional costs for Constellation;
  • In short, profits.

It also doesn’t hurt that about 75 percent of the Constellation generation fleet is fueled by something other than coal. So file this regulatory economics story under “raising rivals costs,” not under “bootlegger gets religion.”

Coal in a world of cheap natural gas

Michael Giberson

Natural gas has become cheap enough relative to coal that some gas-fired electric generators are able to underbid baseload coal generators.  Market-based switching from coal power to gas has increased demand for gas by three billion cubic feet per day according to a Merrill Lynch analysis cited in the Wall Street Journal today. Bad for coal companies, but good for electric power consumers. More:

“There basically is no spot market for coal right now,” adds Jim Thompson, managing editor of the Coal and Energy Price Report in Knoxville, Tenn., a coal-industry newsletter. “Coal companies are living off their utility contracts.”

Utilities mostly obtain coal through multiyear contracts. As a result, even though spot coal prices have fallen, prices paid by utilities are expected to rise 2% this year to an average of $2.11 per million BTUs. Next year, the EIA expects coal prices to dip slightly to an average of $1.91 per million BTUs.

Those numbers suggest coal is still about half the price of natural gas. But the numbers can deceive. Gas-fired power plants convert fuel into electricity more efficiently than coal units, and it is cheaper to move natural gas than coal. As a result, gas can still have an advantage over coal even if the commodity cost is higher.

In related analysis, a paper by Maria Kozhevnikova and Ian Lange, forthcoming in the Review of Industrial Organization, explains why contract lengths for coal purchases are decreasing. Short version: “increased alternatives reduces contract duration.”

Sorting out some claims about Danish wind power

Michael Giberson

A shortened version of Michael Trebilcock’s commentary on wind power, mentioned here the other day, was published in the Financial Post under the not so subtle title of, “Wind power is a complete disaster.”

The Financial Post subsequently published a reply by Sigurd Lauge Pedersen, a Senior Adviser to the Danish Energy Agency: “Wind power works.”

Trebilcock is back in the Financial Post with “The myth of the Danish green energy ‘miracle’.”

Pedersen begins, “It is perfectly legitimate to hate wind power. But it is more convincing if you do your homework first.” Trebilcock, in his reply, begins by casting aspersions on the Danish government’s sensitivity to criticism of their wind power experience. Both authors have some helpful points to make, but I object to the unnecessarily strident and snide tone of the exchange. (Hey, that’s what blogs are for! -ed.)

If Pedersen had done his homework, say by reviewing the Arthur Campbell paper cited in Trebilcock’s submission to the Ontario Legislative Committee on the Green Energy Act (mentioned in the original op-ed), Pedersen would have realized that claiming wind power raises CO2 emissions is not absurd. Instead it is merely unlikely.

If Trebilcock were more careful, or maybe if he understood wind power better, he’d have avoided the modest non sequitur of, “Most wind turbines run at about 25% of rated capacity, requiring back-up generation for the balance of the time.” No one, so far as I am aware, expects to get a constant 100 percent of nameplate capacity delivered from their wind power (or any other) generation, so what “balance of the time” is he referring to?

It is well known that “facts” circulating in public discourse sometimes stray from their original meaning, so it is sometimes useful to track down sources.  In the continuation I try to sort out two disputed claims made by Trebilcock in his first Financial Post op-ed.

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Consumers asked to pay more next year for last year’s increases in utility costs

Michael Giberson

A story from the Charlotte Observer provides a reminder of the speed at which useful information about the scarcity of resources percolates through regulated electric utility rates: “Duke to seek rate increases.”

In brief, Duke Energy is requesting approval from the North Carolina Utilities Commission to raise rates beginning September 2009 and continuing at least through August 2010, because last year it paid more than the year before for coal and other fuel-related expenses. The article notes that Duke plans to make a similar request in South Carolina this summer, with new rates to take effect in October of this year.

Of course, like other energy prices, coal prices are much lower now than they were six months ago.  Carolinians can expect to benefit from today’s lower fuel prices beginning in the Fall of 2010.

Meanwhile, from the part of Texas with restructured retail electric power markets, the question isn’t how much future rates will have to rise to cover last year’s increase in costs, but rather: “Why haven’t Texas electric rates fallen more sharply?