Coal Rising: Why Coal is No Longer a "Cheap" Long-term Supply Option.

While oil and natural gas have come off the highs in a meaningful way over the past few months, coal is still riding high. The price of Northern Appalachian Coal has nearly tripled over the past year due to strong export demand, and with many long term contracts rolling off over the next few months, our local utilities are waking up to a sad reality. Coal is no longer cheap. 

What happened here? I know it's a global marketplace out there, but we have more coal than anyone else on the planet. Sure its ugly coming out of the ground and even uglier once it's burned but it's ours and according to the coal industry we have a hundred years worth of cheap reliable coal under the ground right here in the US. Now I am not saying the coal industry is wrong about the fact that we have a lot of coal, my problem is with that word cheap. Given what is happening to coal prices that word cheap doesn't seem to fit the profile any more. Cheap now seems to have been replaced with the words "market price". The same "expensive" words used on menus in fine restaurants to indicate the price of their lobster.

You might ask. Who invited the rest of the world to our cheap energy party anyway? The answer of course is the same answer you get when you question the oil companies on the price of oil. Its all a question of supply and demand. The market speaks and we merely abide. In other words, the coal companies are relying on the better lucky than smart defense, that prices are market driven so don't blame us if they get out of whack. I don't actually have a problem with that.  Global demand for coal has been on the rise and American coal companies are open for business. More demand means more pressure on tight supplies, driving prices higher. It's a beautiful thing, but only if you are the one pulling the coal out of the ground.

This is not to say that this situation will last. Coal prices might come right back down next year, but that wouldn't change the fact that in the short term we are stuck competing for long-term contracts for our lump of coal with overseas consumers who have been forced to look for new coal suppliers due to a series of supply disruptions in China, Australia, and South Africa over the past year.  US coal is now a valuable global commodity. Indeed, this would be a great US export success story if it wasn't for the fact that this export demand is also pushing our coal prices through the roof. The rise in coal prices has become so extreme in fact that it has created an unusual situation in the US energy markets where, on a plant cost comparison basis, natural gas is now actually a cheaper fuel than coal (see graph below):

While it seems like we should start to see fuel switching demand away from coal to natural gas given this recent market dislocation, the decision making process isn't that simple. Existing long term contracts for coal (1-5yrs), lower coal transport costs for some utilities, and the desire by utilities to wait for a longer period to determine if it is worth cycling their coal plants up and down, are likely to make any transition slow. The game, however, is certainly changing. Coal is clearly no longer our default "cheap" energy source. Even without a cap on carbon, which is likely over the next few years, natural gas is now looking like a less volatile, cost-competitive alternative to coal. Indeed, with capital expenditure costs for coal plants rising and coal plant challenges getting tougher to win, utilities are already starting to wake up to the fact that coal isn't what it used to be. Some day soon, the utilities might turn to the waiter and say, on second thought, maybe I won't have the lobster.