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A Risky Proposition: Why Cheap Coal Is Really, Really Dead

By Climate Guest Contributor on July 2, 2012 at 12:30 pm

"A Risky Proposition: Why Cheap Coal Is Really, Really Dead"


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by Justin Guay, via the Sierra Club

Despite what the coal industry would have you believe, the days of cheap, affordable coal fired power are over.

That’s the conclusion of the Sierra Club’s most recent report Locked In, which analyzes the wide array of financial risks coal plant investments face. We decided to look into these risks because while the environmental and human health impacts of coal plant investments are increasingly well known, the financial impacts are not. What we found was eye opening – some of the world’s largest coal plants are on the verge of bankruptcy and an emerging ‘Organization of Coal Exporting Countries’ (OCEC) on the rise. As the title of our report suggests, avoiding locking ourselves into this risky environment is tremendously important because social and environmental damages aside – new coal plants are just lousy investments.

Here’s the biggest risks coal plant financiers face:

Plant construction costs are rising and increasingly unpredictable: Over the past decade, in the U.S. and abroad, plant costs have increased by up to 100 percent.  Add to that lengthy design and construction periods (5-7 years) and you get cost projections that are wildly out of date and that significantly understate the cost of new plants.

Coal prices are volatile, increasing, and exposed to an emerging ‘OCEC’:
Just like oil prices, coal prices have trended sharply upward around the world. Worse, just like the oil market, the international coal market is highly concentrated; The top two producers alone – Australia and Indonesia – are responsible for roughly 50 percent of all internationally traded steam coal. That leaves new coal plants at the whim of an emerging “Organization of Coal Exporting Countries” (OCEC) that is increasingly, directly or indirectly, acting to maintain high prices.

Competing clean, renewable energy sources are coming down in price further increasing market uncertainty:
Most reliable estimates put the cost of new wind power between 5 and 10 cents/kWh – at or below the cost of new coal-fired power in the United States. The same is true for solar photovoltaic (“PV”) in the sunniest parts of the US where it now competes for peaking power applications with the cheapest fossil fuel – natural gas. While high in capital expenditure (CapEx) clean energy sources like wind and solar are not exposed to fuel price (OpEx) volatility. In essence, investors lock themselves into the ever increasing costs of coal while competitors increasingly offer attractive returns that are not just environmentally preferable, but also economically preferable.

‘Too Big to Fail’ coal projects like Tata Mundra can and should be avoided: Despite significant coal price increases many new projects routinely underestimate price volatility, the cost of construction and the risk of cost overruns. Way too often the optimistic scenarios predicted by coal proponents fail to materialize, leaving financial wreckage in their wake. For example, even before construction of the 4 GW Tata Mundra project in India is complete, coal prices are three times those cited in its bid.  The problem is Tata Mundra is bound by a contract that fixes prices for decades to come forcing the government and investors to face billions in losses if they do not pass on significant price increases to average Indian consumers.

Ultimately, it’s quite clear to us that international coal markets are far riskier than most think. These risks are wide ranging – from soaring fuel prices to coal cartels – and they are not easily mitigated. Luckily a grassroots rebellion in the US and a growing clean energy revolution in the EU has helped avoid new coal plant lock in. But as the euro zone crisis rages and contributes to a slowing Chinese and Indian economy a significant lock in threat looms as investors seek to finance a new era of coal. But can these economies really afford to lock themselves into billions of dollars in financially risky new coal plant investments? The only rational answer to come to is a resounding NO.

Justin Guay is with the Sierra Club’s international program. This piece was originally published by the Sierra Club.


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7 Responses to A Risky Proposition: Why Cheap Coal Is Really, Really Dead

  1. Andy Olsen says:

    Thank you for this good report.

    Let’s also keep in mind that comparing costs of renewables to coal is like comparing apples to …. carcinogens.

    Renewable electricity is a very different product than fossil electricity. It is cleaner and does not impose costs on society such as mercury deposition, global warming, mining, surface water pollution, etc.

    The costs for fossil energy pollution are involuntarily born by people outside the transaction – a “tax!”

  2. Climate Hawk says:

    Interesting article. Too bad Sierra Club’s credibility is, perhaps, permanently tarnished by having taken tens of millions of dollars from the Natural Gas lobby.

    Interestingly enough, I can’t recall the Sierra Club taking a position on Fracking. Have they?

  3. ANGRY BADGER says:

    One of the central issues here is what we can do for those displaced by our move away from fossil fuels. These folks are pawns in coal’s fight against renewables and they deserve better. They have to be brought along with the rest of us and not discarded.
    This is, arguably, a case where Obama’s failure to openly confront the issue just leads to more opposition from the miners. NPR just reported that some Federal prisoner in Mingo County, WV beat Obama in the primary. What we have here is a failure to communicate.

  4. Rabid Doomsayer says:

    India just cannot get enough coal to fully poweer it’s existing power stations. China is expanding imports and local production. Assessing the real viability of the world’s coal reserves is a complex task, at least some “proven reserves” would appear to be uneconomic even at much higher prices.

    World wide there is a shortage of coal and Peabody gets it for a buck a ton.

  5. Theodore says:

    It sounds like Coal and Renewables are both drunk and are about to have a fight in the parking lot of the bar. Renewables is hiding behind a car, hoping Coal won’t find him. Coal comes out of the bar and trips over a rock, falling flat on his face. “Oh good!” says Renewables, “I’m winning.”

    What we are watching is not a contest. It takes a lot of imagination to see effort when none is being expended.