CNBC viewers may have been
surprised to hear NEC Director Gary Cohn say that “at some point in the cycle,
coal will be competitive again”. Really? After all, such technological innovations as
fracking and horizontal drilling caused US oil and gas production to almost
double in just one decade, and natural gas to become the fuel of choice for
power plants.
Cheap prices for natgas and
pollution issues for coal are the big market drivers. But both could see changes if not outright
reversals.
In the US, natural gas prices
broadly averaged between $8.8-$4 per Million Btu in the 2000s but dropped to
$4.4-$2.7 over the 2010-2015 period.
After touching a low of $1.49 in March 2016, they rebounded above $3 this
year. Logically, such rebound in price
benefitted coal: First quarter 2017 electricity generation from coal grew 5%
year-on-year.
Pollution is the other key
factor. According to the Energy
Administration Agency, in 2016 coal-burning power plants worldwide released around
2 lbs of CO2 per Kwh. They also released
other undesirable gases, metals and particules.
Natgas-fired plants only released 0.8-0.9 lb/Kwh[1]. As the world pushes for lower emissions and
countries may tax CO2 at $30-$50/t, coal is handicapped.
But technology is beginning
to change that. High Efficiency-Low
Emissions coal-fired plants are already reaching efficiency levels of 45% vs.
33% for conventional ones, and 50% is a realistic goal. By comparison, state-of-the-art natgas power
plants exceed 60%.
Today, the most advanced Japanese
combined cycle plants which feed pulverized coal and burn it at very high
temperatures achieve emission levels of around 1.5 lbs/Kwh. By the early 2020s, 1.2-1.3 lbs/Kwh will
likely be achieved. Further out, fitting
these plants with Carbon Capture and Storage (CCS) technology could actually
transform coal into a clean fuel with CO2 emissions in the 0.2-0.25 lb/Kwh range. Of course, such technologies will need to be
cost effective, and developing them will take time (10 to 15 years).
But coal is the most abundant
energy source on earth, and countries such as China, India and South Africa which
don’t have much oil, do have a lot of coal.
It is easy to store and to transport.
Coal-fired plants provide cheap energy around the clock, day and night,
rain or shine. From an economic and
strategic point of view, it is therefore a very valuable commodity.
Its pollution characteristics
and the great technological advances which benefitted natural gas have pushed
it aside (at least in developed countries), but technology and the need to
produce more electricity will likely bring it back.
A contrarian investor with a
long term view should keep an eye on it.
The interested reader may take the demise of coal with a grain of
salt. Dirty coal is slowly dying, but clean
coal will likely rise from its ashes.
