by Nancy Spring, Managing Editor
What can we say about coal that hasn’t been said before?
It’s inexpensive-and environmentally costly. It fuels reliable power plants-and creates dangerous situations for miners. With today’s technology, we do a great job of controlling emissions-and now we have to worry about global warming.
What we absolutely have to say, though, is that 50 percent of the electricity in the U.S. is generated by coal and having a dependable supply of coal is essential. We went straight to one of the nation’s largest generators of electricity, American Electric Power, to find out how the coal supply and demand equation was adding up. Coal-fired plants account for 73 percent of AEP’s 38,000 MW of generating capacity.
Who better to talk with than the man in charge of fuel supply at AEP. Chuck Zebula, senior vice president, fuel, emissions and logistics for American Electric Power, oversees all coal procurement and transportation, emissions marketing and fuel logistics for the company. His group buys about 80 million tons of coal a year and is responsible for transporting that coal to the power plants.
EL&P: According to the Energy Information Administration, from 2002 to 2006, the average delivered price per short ton rose $10. Are coal prices ?reasonable??
CZ: The tricky thing here is that 2002 was kind of a trough in prices and since then prices have continued to rise year on year. We have seen a similar increase in our system. If I think of the AEP system as sort of a mini-domestic picture, because we do buy all kinds of coals from all different regions, the $10 price increase does seem reasonable.
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Are long-term contracts the only tool utilities have to keep coal expenses under control?
That certainly is one way, and we do use a variety of contracting instruments to buy our coal. We don’t want to buy all of it under a long-term contract because history has shown us that’s not the best thing to do. We buy some long-term contract coal, we buy some coal at what’s defined as a medium-contracting period, and we do some short- or spot-term purchasing as well. That is a more prudent practice than simply buying all your coal under long-term contracts.
Can you define long-term, medium-term and short?
In the past, many people thought of a long-term contract as greater than 10 years, but the industry has shifted its definition of a long-term contract to be something more in the range of five-plus years, medium-term would be two to five years, and short-term less than two years.
Different mining regions and different companies have different objectives, too. Some of the smaller companies like to sell longer term contract coal and some of the bigger companies don’t. It depends on the market conditions and what their expectations of future pricing are, and in the case of publicly traded coal companies, it’s also what their investors want as well.
How else can you control costs?
Another tool that we have is to enable flexibility with what we can do. In other words, we’re building a lot of environmental controls at AEP and that enables us to buy some coals that generally are lower priced on the market. And it’s not only the kinds of coals we can buy, but how we deliver them as well. If you need a very specific coal and you’re tied to one mode of transportation, you’re probably going to pay a lot more for that coal than if you could buy coal from different regions and deliver it by rail, barge or truck. When you have a lot more options, you can play off those options.
So coal prices vary between regions and you can take advantage of that.
That’s right. The prices do vary appreciably. Powder River Basin coal now sells for $10 to $12 a ton. The big issue with that coal is it has much less heat in it, only 8,800 Btu per pound, and of course it costs you a lot of money to transport that coal because it’s out in Wyoming. If you want to transport it to one of our power stations in Indiana, that’s a long way to move that coal. The transportation costs can be equal to or more than the cost of the coal.
Appalachian coals are selling today for $50 a ton, but they have a much higher heat content-12,500 Btu per pound. If you’re just looking at the Btu you buy in a ton, you’re getting 40 percent more Btu when you buy the higher Btu coal, so you don’t need to buy as much, and you don’t need to transport as much. And generally that coal transports to your power plant at a fraction of the coal price, not a multiple of the coal price, like the Western coals. There are differences in sulfur content as well. There’s a “cost” to emit sulfur for utilities.
So you’re looking at the Btu content, the sulfur content and the location, and whether or not we can deliver that coal or burn that coal. We try to solve that equation to generate the lowest cost megawatt hours. I can buy some really bad coal and have some very cheap Btu sitting on the ground, but if it doesn’t work in the plant, it’s not doing AEP much good. You’re really trying to buy the Btu that make the boiler work and convert them to megawatt hours at a very reasonable cost.
We can take advantage of those variances, but it’s not binary. In other words, here I am at one plant, and I don’t like the price of central Appalachian coal. I want to switch. But, I may need to spend some capital to switch. I may only be able to blend 30 percent of that Western coal in with the Appalachian in that boiler. There are all kinds of variants regarding how we can take advantage of the different types of coals and prices available.
It certainly does help to be as big as AEP, doesn?t it?
It does help in these kinds of situations.
Why do we import coal into the U.S. Isn?t there enough coal being produced in the U.S.?
We don’t import any coal into the AEP system, so we benefit when the coastal utilities and those just inland from the coast do import coal. Sometimes they’re doing it for cost reasons. When you look at where those utilities are located, New York, Baltimore, the Carolinas, Alabama, Georgia, Florida, moving coal from West Virginia to any of those places can be expensive, so depending on the strength of the dollar, the available transportation, and the quality of the coal, sometimes for those coastal utilities with access to import markets, it makes more economic sense to import coal instead of buying domestic coals.
It doesn’t work for AEP under the current coal pricing regime that we’re in. Could it some day? Maybe. Next year, it looks like the U.S. is going to export more coal. There is a balance there-imports, exports, and of course the domestic needs as well.
Have the major rail transportation problems been solved?
Have the major rail transportation problems been solved?
For the most part, 2004, 2005 and 2006 were pretty challenging years for transporting coal. In 2006, and so far in 2007, for the most part, a lot of those issues have been resolved, meaning we’re not sitting on pins and needles, worrying about the performance of the railroads. Things have settled down, but it’s still a great challenge. Think about moving coal from Wyoming to Texas, Michigan, New York, or Alabama. In Wyoming, they mine about 365 million tons a year-that’s a million tons a day and each train holds 15,000 tons. Think of the magnitude of what needs to occur. It’s a very complex and important logistical challenge. For the most part, the railroads have figured ways to do it more efficiently and invested some capital, so a lot of the issues that we’ve dealt with for the last three years have largely been solved.
Will coal-fired generation increase in 2008 over 2007?
Across the country, my expectations are that 2008 will be another strong year for coal. There’s a very strong international market, and it appears that some domestic coal will be heading to the export market. And I think that coal-fired generation will have another strong year in 2008. So, the fundamentals look very good for coal in the upcoming year.
Coal stocks are adequate?
Yes.
Are there other issues you?d like to address?
It is important to remember that mining companies are facing a lot of challenges with safety, the demographics of miners, permitting, and other issues. Increasing prices for diesel fuel, explosives and all the things that are ingredients of mining mean there are a lot of cost pressures in that industry, and as a utility buyer, we always need to be cognizant of what’s going on in their cost profile. We’re always concerned about that.