Perspective: The War on Coal and Utilities will raise U.S. energy costs
Brian Blazina, Energy Resource Americas (ENRAM)
September 12, 2016 (last updated)
Chicago - Recent regulatory issues may further increase prices in the U.S. and globally. Although not as stringent as expected, President Obama's plan to cut carbon emissions is directed at coal-fired power plants, which are the largest source of carbon pollution in the U.S. The U.S. Supreme Court recently ruled against the EPA, that the cost/benefit of the EPA rules must be proven. However, that ruling, while some folks celebrated, was too late for the coal industry - some companies have already declared bankruptcy. The bankruptcies are also celebrated by the clean energy movement. However, significant economic impact on the U.S. energy costs to consumer, commercial and industrial users may be forthcoming - regardless of where one stands on this issue.
Coal supporters claim jobs and local economies will get hurt, but coal exports and volumes had already started to decline even before this announcement. Even at a six-year low, coal prices have not helped the coal business. Not only may coal companies be hurt by this new legislation, but the rail companies that transport the coal, lose business, too. However, the negative impact may be already built into the future market value of coal companies. With the recent free-fall in commodity prices, the bottom could already be built into the coal company equity values - unless we import deflation from the rest of the world, and/or interest rates are raised. Expect another leg down, and more bankruptcies if that happens.
Unfortunately, for coal companies, Wall Street looks at the future as zero value across the board – shorting the coal industry with the hope that equity prices get driven down, so they can cover their short positions at a low stock price or never in the event of bankruptcy. On the other side of the trade, if zero value is not realized and the stock values rise again in the proverbial “hockey stick” direction, then there is money to be made. In the current coal industry environment however, nobody is that smart or that stupid to know the final outcome, but the tendency feels like worse than better, unless commodity prices, especially natural gas, shoot up significantly higher.
Utility costs may rise because power companies need to cover the investment cost for cleaner coal production, and for changing over some power production from coal to natural gas, through increases in the regulated rate base used for pricing to commercial and retail customers. Rate bases are increased by such capital investments. Without getting into the weeds, rates are changed based on an allowed percentage return on the "allowable" rate base. However, utilities still have to answer to PUCs (Public Utility Commissions) when seeking increases - a very subjective process in some cases, resulting in squeezing utilities between needed capital investment versus profitability - in some cases allowing middlemen, who do not produce energy, but collect the rent, more profits than utilities who actually produce the energy.
billions in investment required for an export facility is a barrier
to entry and a bit of a check on over-building infrastructure,
and thus, over-exporting too much natural gas to the point
of driving up US manufacturing and consumer costs.
As more natural gas is used for power production by utilities, then less gas may be available for manufacturing, raising natural gas prices. And utilities need and want a higher natural gas price so they can utilize their remaining low-cost coal supply while raising their power prices, thus improving rather flat financial results. As utilities rely on more natural gas power generation, versus coal, natural gas price increases may lead to more expensive power production. However, structural market conditions may keep natural gas as the main choice for producing electricity and running manufacturing plants in the foreseeable future.
The recent approval of some natural gas exports will also increase natural gas prices; however, for natural gas only, the market provides incentive for additional exploration and production of the more abundant US natural gas reserves - somewhat of a cap on natural gas prices. The billions in investment required for an export facility is a barrier to entry and a bit of a check on over-building export infrastructure, and thus, over-exporting natural gas to the point of driving up US manufacturing and consumer costs.
Some natural gas industry experts place the sweet spot for natural gas pricing at $4 to $5 per million cubic feet of supply. This price range keeps production projects economically viable while providing somewhat of a cap on power production costs for utilities and manufacturers. Prices below these numbers shuts in new production, or causes producers to flare (burn off) supply - especially when the gas is a bi-product of crude oil production.
Finally, one has to ask why the coal industry spent so much capital on lobbying - like having coal ash kept off the list of hazardous materials - instead of investing in natural gas production and transportation companies when they were financially stronger. They can still invest in alternative power production during this current commodity downturn. Other energy companies diversified - why not the coal industry?
However, attacking the coal industry while they are down, but still representing nearly a third of U.S. energy production, may raise all other energy costs including natural gas and vehicle fuels, harming the U.S. economy and people. More care should be given to assure U.S. industry and people preserve their competitive energy cost positioning versus the rest of the world.