Coal Power

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See all Bulls Reasons Bulls Perspectives Coal is still the best bet to replace oil 0% agree Coal is still the best bet to replace oil Coal is the most feasible replacement for oil given its abundant supply. It is highly likely that Coal-to-Liquids will beat out biofuels if it can be made more environmentally friendly. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears Perspectives Increased pressure will cause a shift away from coal 0% agree Increased pressure will cause a shift away from coal Increased pressure on companies to reduce greenhouse gas emissions will cause a gradual shift away from coal consumption for power generation among western nations. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion "For those concerned over energy security, coal is comforting— the U.S. holds 25% of the w... more [Dismiss] [Done] See All Suggestions

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This article describes a concept which could impact a variety of companies and industries. The article lists companies that could benefit or be harmed by the trend. To see what companies and articles reference this concept page, click here.

If you are reading this article on a computer plugged into a standard wall socket in the U.S., there is a 50% chance that your computer is being powered by coal. Coal is the predominant source of electricity around the world, well surpassing nuclear energy (40% of electricity generation versus 20% of generation with gas, the next largest -- and only 2% of all others, including all renewable energy) . Coal, like other fossil fuels, is made of plant matter that is trapped in ecosystems that prevent it from biodegrading— over hundreds of years, often accompanied by high temperatures and pressure, coal is formed.

Why coal for electricity generation? The process of electricity generation with coal is simple, compared to, say, nuclear energy. The coal is pulverized, then burned in a furnace, the heat from which is used to create steam, which spins a turbine that ultimately powers a generator. Mined from the earth, typically via a series of underground mine shafts, coal is also plentiful. There are an estimated 150+ years of proven coal reserves left in the world (estimates of probable reserves are higher), as compared to only 41 years of oil reserves. Hence, all the fears over peak oil. It’s also distributed widely around the world, with China, U.S., India, and Australia the top producers. For those concerned over energy security, coal is comforting— the U.S. holds 25% of the world’s coal reserves.

Estimated CO2 emissions per Terrawatt of various electricity sources

Contribution to electricity generation worldwide

However, coal is dirty. It contains many impurities that are released into the atmosphere when coal is burned, and it is also a large producer of CO2 emissions, the largest single contributor to greenhouse gas emissions in the world. The process of producing electricity from coal has historically been very inefficient, achieving only 35% thermodynamic efficiency (i.e., 65% of the energy stored in coal is wasted). Moreover, in developed countries such as the U.S., smoke-belching coal plants are typically resisted by local communities, making commissioning new power plants difficult.

The prospects for the coal industry are mixed as a result of the above factors. On the one hand, coal is a cheap, plentiful source of energy. As long as it remains so, it will be a major source of power for the global economy, especially given rising global energy demand. On the other hand, coal is the dirtiest of fossil fuels. The combination of these two factors has led to a swath of innovations attempting to store emissions underground or under the sea (think landfill for CO2 emissions). Ultimately, coal's cost advantage may be eroded by a system of carbon trading or a carbon tax.

[edit] Demand Drivers

As demand for coal has increased, so too have coal prices, with futures reaching a record high of $100/ton in May of 2008.

A coal power plant in Cheshire, OH

[edit] GDP growth

As a major source of electricity around the world, as electricity consumption grows, Electric utilities demand more coal. GDP growth is the main long-term driver of electricity consumption. This happens for two reasons. First, commercial and industrial users are heavy users of energy, so as businesses flourish, so does coal demand -- witness the industrial revolution. Second, as residential users become wealthier, they demand amenities that require more electricity -- refrigerators, air conditioners, etc. We're seeing both of these trends play out in China, where the rising demands of the middle class and the insatiable demand for natural resources are fueling a massive increases in coal demand, driving up prices all over the world.

[edit] Weather

There is a reason why we call it "room temperature." Because we want the temperature of our rooms to remain constant. The second big driver of electricity demand is the weather. As summers get hotter, in particular, air conditioners crank up and refrigerators turn up the power consumption. While this fact might presage a vicious cycle of global warming -- where hotter summers lead to increased energy use, which leads to more greenhouse gas emissions and therefore even hotter summers -- thus far, the weather-related impact on coal has been largely based on year-to-year temperature volatility.

[edit] Demand for steel

The second major use for coal is as coke, which is a high-energy, low-ash, bituminous coal, formed by baking coal in an oven, ridding the coal of the water, gas, and tar that is naturally found in coal mined from the earth. Coke is used in the smelting of iron ore to form steel, and as a result, is a major input into the steel-making process.

[edit] Cost of alternatives

Coal is typically the lowest cost form of energy in the world. But as other forms of energy evolve, especially nuclear and natural gas, coal's major competitors in electricity generation, coal may not be as attractive. Many have heard of the example of wind power, which has achieved drastic cost reductions over the past 20 years, such that it can compete on a price competitive basis with coal in some areas.

Rising oil prices can increase demand for synthetic fuels made from.coal. The U.S. Military, for example, in May of 2008 tested a jet that broke the sound barrier using synthetic fuel. Since the military is the largest single consumer of oil in the U.S., at 1.5% the country's total, and rising oil prices drove the Defense Department's energy bill up 25% in the last year. Since estimates state that commercial-scale synthetic-fuel refineries could sell the fuel at just $55 a barrel, the military is now pushing away from oil - which could actually drive up demand for coal even further.^[1]

[edit] Investment in Coal Power Plants

On February 4th, JP Morgan Chase, Citigroup, and Morgan Stanley stated that they would put into effect a set of "Carbon Principles" by which they would give investment priority to clean energy groups, and force any company planning to build coal-powered plants to show how they would deal with the carbon dioxide pollution in order to get investment money. Without the development of carbon-free coal technology, the creation of The Carbon Principles will be a major setback to the advancement of coal as a major form of industrial power because of its difficulty in obtaining financing.

[edit] Environmentalism

In developing nations, coal is both a boon and a curse. In China, the use of cheap, barely-filtered coal plants has caused environmental degradation on an unheard of scale; over 750,000 deaths a year are caused by air pollution and other environmental damages^[2]. In developed nations, like the U.S., political crosshairs have settled on coal as a source of greenhouse gas emissions, as well as environmentally-based damage to the wilderness and the rural towns in the mountain ranges where it is mined. Environmental legislation making it more difficult to mine coal or restricting greenhouse gas emissions both have the potential to greatly increase the cost of the fuel and greatly decrease demand by electric utilities for coal-fired power plants; developing renewable energy sources further increase this risk by giving utilities alternatives to coal and other fossil fuels.

[edit] Companies who stand to benefit

Peabody Energy, the grandaddy of the U.S. coal industry and the top coal producer in the country, is a clear winner from a coal boom. As goes the price of coal rise and fall, so typically go the fortunes of Peabody.

The next largest U.S. coal companies, ordered by tons of output are Arch Coal (ACI), Kennecott Energy Company (The U.S. subsidiary of Rio Tinto (RTP)), CONSOL Energy (CNX), and Foundation Coal Holdings (FCL). These five companies accounted for 53% of U.S. production in 2005.

CSX, one of the largest U.S. railroads, and Burlington Northern Santa Fe, which recently has received attention from Warren Buffett, will both benefit from the fact that coal is largely shipped in bulk by rail or by multi-point shipping (e.g., barge to railroad.).

DryShips the largest dry bulk shipper, is to international coal transportation what railroads are to domestic coal transportation. The company should benefit from the increased need to transport vast quantities of coal around the world, as well as the general boom in shipping as a result of globalization. Excel Maritime Carriers (EXM) is a more pure play on the shipping of coal and iron ore.

Bucyrus International (BUCY) sells coal mining equipment, which accounted for 73% of its machines sales during 2007.

Coal-to-Liquid companies such as Rentech (RTK) and Sasol (SSL) will stand to benefit if cleaning technologies improve.

[edit] Companies who stand to lose

As competitors to coal, especially among other forms of dirty energy, nuclear companies and natural gas producers would not cheer a boom in coal. Exelon and Dominion Resources, operators of nuclear power plants in the U.S., would not benefit from, for example, a dramatic improvement in clean coal technologies which would reduce the carbon footprint of coal plants.

Keeping in mind the consumption of coal is driven by demand for electricity manufacturers of air conditioning and refrigeration systems have a love/hate relationship with coal. Higher energy prices means people will turn on their air conditioners less, meaning less wear and tear and therefore less frequent replacements. But high electricity prices also provide an increased incentive to replace old, obsolete equipment to more energy-efficient, higher priced lines. Carrier Corporation, a subsidiary of United Technologies, is the largest maker of air conditioners and refrigeration systems worldwide. Additionally, Emerson Electric Company (EMR) is the world's largest manufacturer of energy efficient (heat pump) compressors and is a global supplier to all major HVAC OEMs such as United Technologies.

Steel companies and cement companies, for whom coal is a major input into the production process, are also exposed to price and supply volatility in the coal industry. Alcoa, the aluminum smelter, and Lafarge, the cement company, are among the ten largest consumers of coal in the U.S., while steel companies such as Mittal and United States Steel find themselves exposed as well.