The global economy is affecting our industry dramatically. Rising demand for oil and natural gas means that power generators and industrial plants will be desperate for basic feedstock that helps feed the American economy.
New technologies will be created and innovation in our industry will continue to grow, which will invariably lead to more inventive uses for coal. With the coal prices right incentives and under the proper market conditions, companies will introduce relevant products and services too meet these needs and demands. Without this type of thinking in the energy sector -- where the ever-increasing demand for power and gas is tapping the availability of vital fuels and putting upward pressure on prices, it will result in dire consequences to the global economy.
As we all know, natural gas is a finite resource, which at the current rate of production and consumption would last about 60 more years in the United States. We also must face the fact that developing nations will expand and demand more of the world's oil and natural gas to fuel their growth. Since the U.S. comprises approximately five percent of the world population but uses about 30 percent of the energy, it is inevitable for that balance to shift, especially in light of the shift in manufacturing capacity to overseas markets.
With India and China seeking the same resources as the United States, costs for these commodities will rise. For instance, the U.S. Energy Information Administration (EIA) projects oil consumption to increase by 1/3 through 2030 while electricity demand will rise by 50 percent over the next decade. Some experts predict this will lead to oil that may cost as much as $100 a barrel while natural gas could run as high as $8+ per million BTUs, in the same time period.
As oil prices rise, it usually causes other commodities such as natural gas and coal to rise as well, generally at a lesser rate than oil. Coal typically rises at a rate of 40% of that of oil, making it the cheapest and most abundant alternative to oil, which would explain why the EIA projects its use to climb over the next two decades and does not expect nuclear or renewable energy to reduce coal's market share during this time.
There are solutions to the increasing demand for energy, and include several which use coal as its feed stock. Coal-to-liquids, is one in which coal is broken down to form a fuel oil. While potentially much cheaper per barrel than oil, it is capital intensive and requires that oil prices stay high to motivate investors to risk this capital. Coal gasification plants are another technology we have seen in the limelight in our industry. These are power facilities that clean the impurities from coal before it is burned and sent out the smokestack, or in most recent developments (mimicking a DOE project from the 70's), creating pipeline quality natural gas (PQNG).
When coal is burned, it produces sulfur dioxide and nitrogen oxide, which produces acid rain and smog. In addition it produces particulate matter and mercury. Under the Clean Air Act, those pollutants must be removed from exhaust gases that come out of the smoke stack. Coal combustion also produces carbon dioxide, which is not currently regulated. However the pressure to do so is increasing.
Coal gasification removes the sulfur dioxide, mercury and carbon dioxide from the "syngas" before it is combusted or converted to PQNG, say experts. And because the "syngas" is cleaner than raw coal, lower quantities of nitrogen oxide and particulate matter are produced during the combustion process. The carbon dioxide is more concentrated, which makes it easier to capture.
Four coal gasification power plants are now operating: two in the United States and two in Europe. American Electric Power expects to have engineering studies completed next month on two possible coal gasification plants in Ohio and West Virginia. It would like to have one or both facilities operational by decade's end. Duke Energy has picked up Cinergy's proposed coal gasification plant in Ohio, since the merger of the two organizations.
There are viable options to help reduce the global dependence on oil and natural gas. Employing energy efficient technologies is a good start as well as turning waste energy into power and heat.
To keep the global economy viable, creative solutions involving all different fuel forms are necessary. Coal will continue to play a major role, however the form of that role appears to be changing. New technologies are on the verge of becoming commercially commonplace, and those utilities who utilize the traditional combustion method must commit to controlling their emissions and their carbon footprints. Regulatory and market pressures are giving coal a chance to reinvent itself, and with oil and gas prices at their current levels, and no major relief in site, the bulk of the new power required will likely be provided using coal, the workhorse of the industry.
Coal is not without its problems. Eastern spot prices for coal have risen, and have reached their highest levels in more than 25 years. This is the second time in 4 years that coal prices have more than doubled their pre-2000 pricing levels . This spike has caused prices in new long term contracts to rise as well. The current prolonged spike in Eastern spot prices is mainly due to supply shortages, as demand has not grown much in recent years.
There are several reasons that coal prices have spiked. The coal industry has undergone significant consolidation over the past 15 years, with indications pointing to a continuation in that trend. The top ten producers controlled 64% of coal production in the U.S. in 2003, compared to only 36% in 1989. Three companies control 60-70% of production in the Powder River Basin, Northern Appalachia, and Colorado/Utah. This consolidation has contributed to the volatility of spot prices by reducing excess mining capacity along with the number competing for coal contracts.
The reduction in the number of small mines has affected the price of coal in recent years as well. An example of this is a 68% reduction in the number of small mines in Central Appalachia from 1989 to 2003. By reducing the number of small mines, the ability to meet spikes in demand are reduced, resulting in price spikes in the spot market.
There are other factors contributing to rising coal prices; including increase in demand, even though over the last 5 years the increase has been small. Other contributing factors are the reduction in the size of U.S. utility coal stockpiles, the reduction in miner productivity coal prices in all of the major coal producing regions (except Northern Appalachia), pressure from U.S. export coal demand, and the reduction decrease in the number of Class 1 railroads.
With spot market coal prices increasing, where do the opportunities for coal exist? They exist with integrated coal gasification combined cycle plants. Gasification, also known as partial oxidation, has been commercially practiced for many years; especially in the chemical industry, where most of the installed plants produce ammonia, hydrogen or other chemicals. The feedstock for these plants has included natural gas, oil-derived fuels, petroleum coke and coal. Integrated Gasification Combined Cycle (IGCC) is often proposed as an alternate method of converting environmentally disadvantaged fuels into electricity. Some believe that IGCC units will not be built in the short term unless natural gas prices remain elevated, there is high load growth and a national cap on CO2 emissions are implemented. However, with the arrival of the Clean Air Interstate Rule (CAIR) and the Clean Air Mercury Rule , and the availability of high sulfur (i.e. 7 lb. /MMBtu) coal, such as Illinois Basin coal, (See Figure 2) the market for these fuels rests on a technology like IGCC and other gasification processes, which benefit from high sulfur content and which reduce emissions simultaneously. The technology's main long-term advantage is its ability to control greenhouse gas emissions. Integrated gasification combined cycle technology, combined with the sequestration of carbon stripped out in the process, is as close to a perfect solution for environmental emissions as there is. The biggest challenge will be to make it a reality, in light of the costs to develop gasification projects and their financial ramifications.
