fuel Archives - Amateur Earthling

US EIA on the Economics of Coal: No Comment

At the end of 2013, the US Energy Information Administration (EIA) acknowledged that it does not know whether the vast majority of US coal can be mined profitably. If coal mining isn’t profitable, then barring some grand socialist enterprise the black stuff is probably going to stay in the ground where it belongs.

You might think this kind of revision would have warranted a press release, but the EIA’s change of heart was buried in a fine-print footnote to Table 15 of their 2012 Annual Coal Report, which tallies up all the coal resources and reserves in the US, state by state. The new footnote says:

EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions, and after applying assumed mining recovery rates. This estimate does not include any specific economic feasibility criteria. [emphasis added]

This stands in contrast to the footnotes for the same table in their 2011 Annual Coal Report, and many prior years:

EIA’s estimated recoverable reserves include the coal in the demonstrated reserve base considered recoverable after excluding coal estimated to be unavailable due to land use restrictions or currently economically unattractive for mining, and after applying assumed mining recovery rates. [emphasis added]

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Now We’re Hedging With Wind

Price is not the only economic variable to consider in deciding what kind of generation a utility should build. Different kinds of power have different risks associated with them. This is important even if we set aside for the moment the climate risk associated with fossil fuels (e.g. the risk that Miami is going to sink beneath the waves forever within the lifetime of some people now reading this). It’s true even if we ignore the public health consequences of extracting and burning coal and natural gas. As former Colorado PUC chair Ron Binz has pointed out, risk should be an important variable in our planning decisions even within a purely financial, capitalistic framing of the utility resource planning process.

Utility financial risk comes largely from future fuel price uncertainty. Most utility resource planning decisions are made on the basis of expected future prices, without too much thought given to how well constrained those prices are. This is problematic, because building a new power plant is a long-term commitment to buying fuel, and while the guaranteed profits from building the plant go to the utility, the fuel bill goes to the customers. There’s a split incentive between a utility making a long-term commitment to buying fuel, and the customers that end up actually paying for it. Most PUCs also seem to assume that utility customers are pretty risk-tolerant — that we don’t have much desire to insulate ourselves from future fuel price fluctuations. It’s not clear to me how they justify this assumption.

What would happen if we forced the utilities to internalize fuel price risks? The textbook approach to managing financial risk from variable commodity prices is hedging, often with futures contracts (for an intro to futures check out this series on Khan Academy), but they only work as long as there are parties willing to take both sides of the bet. In theory producers want to protect themselves from falling prices, and consumers want to protect themselves from rising prices. Mark Bolinger at Lawrence Berkeley National Labs took a look at all this in a paper I just came across, entitled Wind Power as a Cost-effective Long-term Hedge Against Natural Gas Prices. He found that more than a couple of years into the future and the liquidity of the natural gas futures market dries up. In theory you could hedge 10 years out on the NYMEX exchange, but basically nobody does. Even at 2 years it’s slim!

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When do fuel costs actually matter?

Kim Stanley Robinson gave a fun talk at Google a couple of years ago in which he brought up the possibility of large, slow, wind powered live-aboard bulk freighters, among other ideas. I was reminded of it by this post from Alex Steffen. Especially for commodities like coal, grains and ore — non-perishable goods that get carried in bulk carriers — what matters is the net flux of materials and the predictability of supply. More (or larger) slow ships can deliver the same flux as fewer high speed ones. International contracts for these goods can span decades. If fuel prices became a significant portion of their overall cost, it would be worthwhile to make this kind of ships-for-fuel substitution. However, it turns out that fuel is a vanishingly small proportion of the overall cost of most internationally traded goods.

Our neighbors in Pasadena moved back to Thailand, and packed their entire household into a single half-sized shipping container. The cost to get it from their home in SoCal to their home outside Bangkok was $2000. Their combined airfare was probably a larger fraction of the cost of moving across the Pacific. You can get a full-sized shipping container moved from point A to point B, anywhere within the global shipping network, for several thousand dollars. If your cargo is worth significantly more than that, then you don’t have to worry about Peak Oil destroying your business. For a typical container carrying $500,000 worth of goods, the shipping costs (not all of which are related to fuel!) represent about 1% of the final costs of the goods. If fuel prices were to go up by a factor of ten, the shipping costs would still only represent 10% of the overall cost. This would have an effect on business, to be sure, but it would not cause global trade to collapse.

Continue reading When do fuel costs actually matter?