Report: New Investment in Coal is a Risky Proposition

Guest Blog | March 9, 2011 | Coal, Energy Policy
viewedocA report released today by the Union of Concerned Scientists adds to the growing body of knowledge about the danger of our over-reliance on coal as our primary source of electricity.  The new report, “A Risky Proposition: The Financial Hazards of New Investments in Coal Plants” highlights the financial risks that utilities and ratepayers face when we direct our limited financial resources at the quickly fading and increasingly perilous technology of coal fired power plants.

Many people continue to think that coal is the cheapest and most plentiful electric fuel. Even with continual reminders about the human health and environmental costs of coal, some remain committed to the fuel because of a belief that despite these external costs, coal is still a good investment. “A Risky Proposition” expertly debunks these lingering misconceptions.

The environmental and human health costs associated with coal are of course understated and often ignored drains on the economy, and this new report offers that many direct and more tangible risks for the coal plant owners/operators are also at play. For instance, the United States coal fleet is getting old. According to the report, coal plants are typically designed to produce power for around 30 years, but 72% of U.S. coal capacity is already at least 30 years old.  Thirty-four percent of coal capacity is more than 40 years old. As plants age they become less efficient and less reliable and they therefore have higher maintenance and capital costs. Even coal executives agree that “these aging coal units are no longer efficient enough to compete with new resources.”

Old and inefficient plants have the costly responsibility of cleaning up their dirty operations. In the coming years new Environmental Protection Agency safeguards will cause energy generators to either invest in newer and cleaner technology or to make expensive technological or operational changes in order to reduce air emissions such as acid rain causing sulfur and smog causing nitrogen. They will have to reduce their releases of toxic mercury, safeguard their hazardous coal ash, manage the way they draw water from nearby streams and then limit the polluted wastewater that they dump back in to those streams.

The problem is not limited to age and environmental protection. The demand for coal power in the U.S. is falling, yet coal prices are actually rising as demand in China and India increases. This might seem like bad news, but it is mirrored by ever more affordable alternatives such as energy efficiency and renewable energy sources. The graph below shows the range of costs for various energy technologies and clearly demonstrates that many alternative energy sources are, in fact, less expensive on a per mega-watt hour basis.

Risky Prop Graph

The report also points to the fallacy of our belief in never-ending domestic coal reserves. In fact, reserve estimates and mining productivity are falling in the U.S. and UCS highlights the modern assessments of domestic coal reserves, which show that there is less economically recoverable coal than older data and older methods suggest.

With respect to prices, western coal reserves, for example, are somewhat buffered from spikes in the global coal markets. Nonetheless, between October 2009 and October 2010 the price of a one-month coal contract for western coal rose 67%. As the graph below demonstrates, the price of Appalachian coal is also increasing dramatically.

Risky Prop Coal Price Graph

“A Risky Proposition” concludes by reminding readers that in the 1970s there was a massive over-investment in coal and nuclear plants without proper heed to the associated financial risks. This blind over-investment led to cancellation of 100 nuclear plants and 80 coal plants. But the money was already spent: hundreds of millions or even billions of dollars were wasted and electricity prices skyrocketed, municipal bonds defaulted and legal battles arose. “A Risky Proposition” reminds us that if we learn from history we are not doomed to repeat it. Utilities today have large coal fleets with many old plants that have not already undergone necessary upgrades. They now face a choice of investing huge sums of money to perpetuate the life of these dirty, out-dated facilities or finally retiring them and placing their money on much safer bets.

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