Outside forces conspire to make coal more expensive, long term

by: Eric B.

Thu Apr 09, 2009 at 15:35:09 PM EDT

In yesterday's Financial Times:

Investors should take note, he warned, that high emissions must be curbed, which would hurt businesses that failed to embark now on a low-carbon path. “How good will the business judgment of companies that make high-carbon choices now look in five, 10, 20 years, when it becomes clear that heavily polluting infrastructure has become deadly and must be phased out before the end of its useful life?”

The "he" in question is Obama's climate change envoy, and you'd think he was speaking directly to the state of Michigan, both our utilities and our state government.  Well, especially our state government, since the business judgment of the utilities isn't something the utilities will actually wind up paying for.  If coal plants for them turn out to be a bad investment, which they almost certainly will, Consumers and DTE get to pass the tab along to ratepayers.

Coal supporters -- most recently including Peter Hoekstra's "To the Past!  To the Past!  March to the Future Through the Past!" Op-Ed in yesterday's News -- keep talking about the cost of energy, as if the costs will remain stagnant across the board, or even as if their plans can be realized immediately.  i.e.:

Second, we need an energy policy that enables us to fully develop American sources of oil and natural gas. Unfortunately, the recent federal stimulus package did nothing to encourage the expansion of American oil and natural gas supplies through offshore energy exploration, development of shale oil deposits or drilling in ANWR.

Renewable energy will play a larger role in our national energy mix in coming years, but it cannot replace generating units. The stimulus package included $79 billion to support renewable energy development, but nothing for nuclear power.

The cost of ignoring the need is staggering. Michigan's 21st Century Energy Plan, commissioned by Gov. Jennifer Granholm, projected that the state's electric customers would pay $2 billion more for electricity over 20 years if new baseload power plants are not built in the state.

There is something missing in all of this, which Hoekstra declares to be a common sense approach.  Oh yes, it's a little thing called reality, which exposes the notion of common sense as really something crafted by our own prejudices and not some universal truth.  This is why when someone tells you they have a common sense approach to a problem, it's generally a good idea to go find the nearest bomb shelter.

Anyway, we've seen this nonsense about drilling before ... like last summer when gasoline hit $4 a gallon.  Here is a well-known and well-established fact ... even if we'd authorized drilling and money to subsidize drilling last summer, we would not today be drilling.  We would still be building infrastructure and exploring for the best places to drill. I mean, the amount of oil we think is available in ANWR is not a firm number, but a guess based on how much oil is available in nearby pieces of land.  There might not be anything in ANWR.

The same can be said of oil shale, which is an incredibly water- and energy-intense method of converting hydrocarbons into a synthetic oil.  Why do we have to go to such measure to create something that acts like oil, but isn't?  It's a sign of desperation, that's why.  It's like a pothead who can't get ahold of his connection, so he spends the evening scraping residue out of his bowl. Most any onlooker would suggest that this is unhealthy behavior.  Well, guess what ... that's what developing oil shale is.

Skipping the bit about nuclear power plant construction (the most capital intensive projects, and traditionally the biggest risks ... economics killed nuclear power, not hippies), we get right to the 21st Century Energy Plan, which was practically out of date when it was published and based upon assumptions that just haven't come true.

Most of this I think is supposed to lead us to Hoeksta's vision for Michigan's energy future as played out in a Hoekstra administration.  It means an administration that is not at all focused on the long term, but entirely on the short term.  Why?  Well, you've seen the above comment from the Obama administration.

Perhaps you've also seen this, too. It's the 2009 Energy Outlook from the Energy Information Administration.  It's really long ... something like 230 pages.  But, it is also mighty instructive.  For instance, here is what the outlook has to say about coal power:

Construction costs for new power plants have increased at an extraordinary rate over the past several years. One study, published in mid-2008, reported that construction costs had more than doubled since
2000, with most of the increase occurring since 2005 [73]. Construction costs have increased for plants of all types, including coal, nuclear, natural gas, and wind.

The cost increases can be attributed to several factors, including high worldwide demand for generating equipment, rising labor costs, and, most importantly, sharp increases in the costs of materials (commodities) used for construction, such as cement, iron, steel, and copper. Commodity prices continued to rise through most of 2008, but as oil prices dropped precipitously in the last quarter of the year, commodity prices began to decline. The most recent power plant capital cost index published by Cambridge Energy Research Associates (CERA) shows a slight decline in the index over the past 6 months, and CERA analysts expect further declines [74].

The current financial situation in the United States will also affect the costs of future power plant construction. Financing large projects will be more difficult, and as the slowing economy leads to lower demand for electricity, the need for new capacity may be limited. The resultant easing of demand for construction materials and equipment could lead to lower costs for materials and equipment when new investment does take place in the future. Fluctuating commodity prices, combined with the uncertain financial environment, increase the challenge of projecting future capital costs.

Because some plant types—coal, nuclear, and most renewables—are much more capital-intensive than others (such as natural gas), the mix of future capacity builds and fuels used can differ, depending on the
future path of construction costs. If construction costs increase proportionately for all plant types, natural-gas-fired capacity will become more economical than more capital-intensive technologies. Over the longer term, higher construction costs are likely to lead to higher energy prices and lower energy consumption.

The report is filled with no end to similar and fun revelations.  Like this one:

Findings
The imposition of a GHG reduction policy would affect all aspects of the electric power industry, including decisions about the types of plants built to meet growing electricity demand, the fuels used to generate electricity, the prices consumers will pay in the future, and GHG emissions from electric power plants.

The conclusion is that thanks to coming greenhouse gas policy, the costs for generating electricity with coal are likely to be a good deal more expensive in the mid- to long-term future than they are now, which means that a reliance of coal plants means short the future for ... well, really never.  It takes time to build those coal plants, which means even coal plants permitted this year under the Granholm administration won't go on line for a really long time.  Why?  It's a capital-intensive project ... it takes time to build.  So, the question naturally isn't whether coal is cheaper today, but the relative cost comparisons for coal and clean energy sometime in the future.  Thanks to coming greenhouse gas policy, the costs for coal have no ceiling.  Those power sources that don't generate greenhouse gases are capped by generating costs.