Coal power is starting to return.
According to the Energy Information Administration, natural gas-driven power facilities generated about 85,000 megawatt hours in the U.S. over March, but coal-driven plants produced just over 130,000 megawatt hours. That’s a surprising turnaround for coal, which until recently was at risk of being seriously displaced by the drastically low costs of natural gas.
This turnaround has been slow but quite steady – since May of last year, increasing demand for power over summer and rising natural gas costs have played key roles in pushing coal back into the picture.
MarketWatch indicates that costs for natural gas have gone up almost 30 percent over the past three months and almost 49 percent over the past year. This is, in large part, due to a reduction of oversupply. Accordingly, prices for natural gas rose, and coal began to appear a lot more attractive.
According to the EIA, coal should generate about 40 percent of all the electricity within the U.S. over 2013.
However, this isn’t quite reason enough for coal producers to cheer. For one, this return of coal is expected to be a one-off, for the most part. It’s mostly a function of natural gas prices rising, but once that stabilizes, coal could have to beat a retreat.
Indeed, more and more electric utilities are retrofitting their systems to become compatible with natural gas, meaning they will soon find that it is cheaper to use natural gas than coal. That’s the consensus of a new Bernstein Research report.
Another factor that will aid the advance of natural gas, even as it will likely curtail the role played by coal, is federal legislation. The new regulations, which will establish new emissions norms, are likely to cause electric utilities to simply choose to terminate existing coal-fired operations and move over to natural gas, keeping the longer term in mind.
These new rules are expected to take effect from 2015 onward. Platts quotes from the report, citing the impact of the new legislation as likely to “…drive the retirement of a net 53 GW of coal fired capacity, reducing coal fired generation by 156 million MWh and cutting utility coal burn by some 90 million tons relative to 2011 levels.”
At the same time, however, this decrease ought to be balanced out by almost 40 million MWh that’ll be generated through renewables. Gas generation is projected to account for another 115 million MWh.
The Global Story of Coal
The story of coal’s (temporary?) resurgence has echoes over on European shores. Over there, coal has endured an eight-year-long downward slide. However, imports from the U.S. are now likely to decrease, and Poland and Russia both expect to see drops in coal production.
According to Bloomberg, utilities in Germany continue to burn coal in record amounts, while Indonesia, Australia, and Russia will all see slower exports.
Bloomberg reports on the state of affairs:
“If the European economy recovers and some producers decide to cut their output due to the weakness in the coal market, prices will pick up again, especially if U.S. exports drop,” said Barbara Lambrecht, an analyst at Commerzbank AG in Frankfurt who has covered commodities for six years. “Coal prices won’t rise to the skies. For that, supply on the market is too abundant.”
From an investor’s perspective, coal remains a rather reasonable option. One big thing to keep in mind is that the cost of natural gas is still very much a volatile issue. Sure, it’s very cheap in the U.S. right now. But if natural gas export terminals begin shipping gas out to hungry Asian nations, as is expected, then that price dynamic won’t hold for too long; the cost of natural gas here will begin to rise.
Also, developing nations continue to like coal, mostly because existing infrastructure widely supports it. China is the world’s largest coal importer, with India coming up fourth. Both have populations far in excess of that of the U.S. As a result, they need a lot of coal.
In those countries, demand for energy continues to rise, and coal offers a cheap solution. You may be fairly certain that demand for coal from Asia will continue to stay high for a good while yet.
Companies like Peabody Energy Corp. (NYSE: BTU) and CONSOL Energy Inc. (NYSE: CNX) are in the business of producing and exporting coal. Overall, it’s a good idea to keep a close eye on these and companies like them.
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