If the summer’s hot, the coal industry gets happy

Coal-fired power plants across the country have been backed down lately due to cheap natural gas and a warm winter, with coal producers now counting on a scorching hot summer, with high air conditioning load, to get them out of the hole.

There are a few truisms in the coal business.

At any one time, the industry is mining the “best of what’s left” in terms of coal reserves. That truism is heard a lot particularly in and around Central Appalachia, where coal reserves have been mined hard for about 150 years to fuel an Industrial Revolution and a couple of world wars. Central App coal production is falling like a rock each year, as coal producers work smaller and smaller pockets of ever more marginal coal reserves. That production decline is something that power generators have mentioned a lot lately in earnings calls, etc., as they install SO2 scrubbers and experiment with alternative, high-sulfur coal and coal blends at plants that were in many cases designed to burn Central App low-sulfur coal.

Another truism is that you’re only a really hot summer or a really cold winter away from a good coal market. Though considering the current depressed market, and this cheap gas that may get only marginally more expensive over the next few months, it may take a back-to-back scorcher of a summer and truly frigid winter to make much of a dent.

Domestic thermal coal demand and pricing deteriorated in the first quarter as the mild winter and prolonged low natural gas prices resulted in lower coal burn for electricity generation, said Patriot Coal (NYSE: PCX) in its May 8 earnings statement.

Heating degree days were 21% below normal in the 2012 first quarter, said Patriot, a major producer of coal in West Virginia and western Kentucky. These factors caused inventories at utilities to expand to over 200 million tons at the end of March. Railcar loadings for the first quarter were consequently down 10% year-over-year, and the lowest loadings since early 1994. As a result, U.S. coal producers are closing mines and reducing operating shifts.

Other coal producers, like Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU), are also cutting back production for the same reasons and hoping for a hot summer that will key a market rebound.

A May 17 report on first-quarter developments in the PJM region, prepared by Monitoring Analytics LLC, the Independent Market Monitor for PJM, said: “The results of the market dynamics in the first quarter of 2012 continued to be generally negative for coal fired units. Net revenues declined for coal units in every zone in the first quarter of 2012.”

PJM operates a centrally-dispatched, competitive wholesale power market that includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. A lot of those states, like Ohio, Kentucky and West Virginia, are in the heart of coal country and feature a lot of rapidly-aging and environmentally-embattled coal-fired capacity.

In the first quarter of this year in PJM, coal units provided 39.9%, nuclear units 36.3% and gas units 19% of total generation in the region. Compared to the year-ago quarter, generation from coal units decreased 11.6%, generation from nuclear units increased 8.3%, generation from natural gas units increased 66% and generation from oil units increased 54.2%.

Reports of depressed coal burns are myriad.

Duke Energy Ohio purchased 19.6% less coal in 2011 (6,196,415 tons) compared to 2010 (7,708,853 tons) and continued to experience electricity customer switching during 2011 that resulted in it accumulating more coal than required for the lower level of customer demand, said consultant Schumaker & Co. in a recent audit report filed at the Public Utilities Commission of Ohio.

During a 12-month review period ending Feb. 29, in order to minimize fuel costs, Progress Energy Carolinas took advantage of a “dramatic decrease” in natural gas prices and operated its natural gas-fired combustion turbines at much higher capacity factors as compared with prior review periods, said Dewey Roberts II, Manager-Power System Operations at PEC, in May 9 fuel testimony filed at the South Carolina Public Service Commission.

Due to increasingly lower power prices and reduced demand for coal generation, Duke Energy Indiana‘s coal burn projections for 2012 have been adjusted downward. For example, coal burn for Duke Energy Indiana stations in the December 2011-February 2012 period were about 45% less than the coal burn compared to the same months over the prior five years. If natural and power prices continue to be depressed, there likely will be further downward pressure on Duke Energy Indiana’s coal generation. That’s according to Elliott Batson Jr., a fuels official with a Duke Energy Indiana affiliate. He described the coal situation in April 30 fuel testimony filed at the Indiana Utility Regulatory Commission.

Northern Indiana Public Service‘s Director of Fuel Supply, Kevin Strnatka, said in May 4 fuel adjustment clause testimony filed at the Indiana commission: “The challenge this summer will be to manage the excess coal inventory incurred due to the mild winter and the low natural gas pricing, effectively displacing coal fired generation. Consumption could further decline based on continuing mild weather and persistent low natural gas pricing. NIPSCO will attempt to manage through any excess inventory by working with suppliers to defer tons as allowed in the coal supply agreements, and to redirect coal for consumption from one station to another if necessary, but at the same time attempting to meet the minimum volume commitments in our transportation agreements to forego paying liquidated damage penalties to the railroads.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.