Published on June 28th, 2012 | by Jeremy Bloom0
The era of cheap coal is over
It turns out that coal is bad for business, too. Go figure.
A new report from the Sierra Club takes a look at all the cute little assumptions, subsidies, and glossed-over costs, and points out what should have been obvious: New coal plants are lousy investments.
Here are a few of his findings:
- Plant construction costs are rising and increasingly unpredictable: Over the past decade, in the U.S. and abroad, plant costs have increased by up to 100 percent. Add to that lengthy design and construction periods (5-7 years) and you get cost projections that are wildly out of date and that significantly understate the cost of new plants.
- Coal prices are volatile, increasing, and exposed to an emerging OCEC: Just like oil prices, coal prices have trended sharply upward around the world. Worse, just like the oil market, the international coal market is highly concentrated. The top two producers alone – Australia and Indonesia – are responsible for roughly 50 percent of all internationally traded steam coal. That leaves new coal plants at the whim of this emerging Organization of Coal Exporting Countries that is increasingly, directly or indirectly, acting to maintain high prices.
- Competing clean, renewable energy sources are coming down in price, further increasing market uncertainty: Most reliable estimates put the cost of new wind power between 5 and 10 cents/kWh - at or below the cost of new coal-fired power in the United States. The same is true for solar photovoltaic (PV) in the sunniest parts of the U.S. where it now competes for peaking power applications with the cheapest fossil fuel – natural gas. While high in capital expenditure (CapEx) clean energy sources like wind and solar are not exposed to fuel price (OpEx) volatility. In essence, investors lock themselves into the ever-increasing costs of coal while competitors increasingly offer attractive returns that are not just environmentally preferable, but also economically preferable.
- ‘Too Big to Fail’ coal projects like India’s Tata Mundra can and should be avoided:Despite significant coal price increases, many new projects routinely underestimate price volatility, the cost of construction and the risk of cost overruns. Way too often the optimistic scenarios predicted by coal proponents fail to materialize, leaving financial wreckage in their wake. For example, even before construction of the 4 GW Tata Mundra project in India is complete,coal prices are three times those cited in its bid. The problem is that Tata Mundra is bound by a contract that fixes prices for decades to come forcing the government and investors to face billions in losses if they do not pass on significant price increases to average Indian consumers.
Guay says the biggest risk facing utilities today is that they will lock in obligations to pay ever-increasing prices for a totally out-of-date technology, rather than lock in cost savings on solar, wind, and geothermal power (where the fuel never goes up in price).
“Ultimately, it’s quite clear to us that international coal markets are far riskier than most think. These risks are wide ranging – from soaring fuel prices to coal cartels – and they are not easily mitigated. Luckily a grassroots rebellion in the U.S. and a growing clean energy revolution in the EU have helped avoid new coal plant lock in.”