Power Engineering - High coal price could bring summer energy crunch

17 May 2004 - With the price of coal chasing oil and natural gas upwards, some energy industry analysts and experts believe there could be a crunch this summer when there is high demand for electricity.

Average spot prices for northern and central Appalachian coal on Friday were around $58 per t, more than twice the price last August.

"The price now is very high, at or near record levels," said Jim Thompson, editor of Coal and Energy, an industry newsletter based in Knoxville, Tennessee.

"This summer, if it's hot, it could have an extreme impact on the supply of electricity. If conditions don't change, coal prices could take a considerable upward turn."

Mark Reichman, a coal industry analyst with A.G. Edwards, increased earnings estimates for both Arch Coal and Peabody Energy Corp. this week, based partly on an expectation of higher coal prices.

"The outlook for 2004 and 2005 remains constructive and we expect coal prices to increase or remain firm based on increasing consumption related to strengthening base load demand for electricity," he wrote in a research note.

According to the National Mining Association, some 95 per cent of the approximately 1.2bn t of coal mined in the US each year is sold to power plants.

Those plants are turning more to coal to generate electricity right now because of the high price of oil and natural gas. In turn, that is reducing coal stockpiles by as much as 50 per cent.

Allegheny's Chief Financial Officer Jeff Serkes said the issue of coal price was crucial. "We're 99 per cent hedged for this year ... and for next year we're 60 per cent hedged. We're continually talking with our suppliers, especially our largest supplier, trying to work something out.

A decade ago, power companies typically had long-term contracts for coal of ten years. But a recent shift toward shorter-term contracts has raised fears that production could suffer, pushing up prices for the key energy source.

Coal and Energy's Thompson said utilities have a certain percentage of coal supply needs under contract and buy the rest on an annual or spot basis. Spot now is one year or less, while long-term is 3-5 years.

An added problem this year has been railroad delays causing distribution disruptions, he said. "Eastern railroads are shorting people on services and with natural gas prices high, supplies are strained."

Allen Brooks, an analyst for the Canadian Imperial Bank of Commerce, noted that, on average, coal-fired plants have 40 to 45 days of supplies, down from the 60 to 90 days that was normal during the 1990s.

He gave three explanations for this situation - rail delivery problems, high natural gas prices forcing power plants to burn more coal and high coal prices making users reluctant to build inventories.

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