Category Archives: Economics

German Lignite Mine

In Good Company: A Look at Global Coal Reserve Revisions

In my last post, I recounted some of the indications that have surfaced over the last decade that US coal reserves might not be as large as we think.  The work done by the USGS assessing our reserves, and more recently comments from the coal industry themselves cast doubt on the common refrain that the US is “the Saudi Arabia of coal” and the idea that we have a couple of centuries worth of the fuel just laying around, waiting to be burned.  As it turns out, the US isn’t alone in having potentially unreliable reserve numbers.  Over the decades, many other major coal producing nations have also dramatically revised their reserve estimates.

Internationally the main reserve compilations are done by the UN’s World Energy Council (WEC) and to some degree also the German equivalent of the USGS, known as the BGR. Virtually all global (publicly viewable) statistics on fossil fuel reserves are traceable back to one of those two agencies. For instance, the coal reserve numbers in the International Energy Agency’s (IEA’s) 2011 World Energy Outlook came from the BGR; the numbers in BP’s most recent Statistical Review of Energy came from the WEC.

Of course, both the WEC and the BGR are largely dependent on numbers reported by national agencies (like the USGS, the EIA and the SEC in the case of the US), who compile data directly from state and regional geologic survey and mining agencies, fossil fuel consumers, producers, and the markets that they make up.

Looking back through the years at internationally reported coal reserve numbers, it’s surprisingly common to see big discontinuous revisions.  Below are a few examples from the WEC Resource Surveys going back to 1950, including some of the world’s largest supposed coal reserve holders.  In all cases, the magnitude of the large reserve revisions is much greater than annual coal production can explain.

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Hunter Valley Coal Drag Line

A Long Time Coming: Revising US Coal Reserves

In my previous post I highlighted the recent, quiet admission by the US EIA (in a fine-print footnote to Table 15 of their 2012 Annual Coal Report) that they do not know what fraction of our nation’s large store of coal resources might be economically accessible, and thus potentially classified as reserves.

CEA has long highlighted indications that a revision like this might be in the works, including in our most recent round of coal reports issued last fall (see: Warning: Faulty Reporting of US Coal Reserves).  But we’re not the only ones.  Plenty of other people have pointed out the same thing over the years.  Including…

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An Empty West Virginia Coal Train

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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CC AT-NC-SA by Lars Hammer on Flickr

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!

Average Volume and Open Interest in NYMEX Gas Futures Contracts

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Running on Empty

Warning: Faulty Reporting on US Coal Supplies

PEAK COAL REPORT: U.S. COAL “RESERVES” ARE INCORRECTLY CALCULATED, SUPPOSED 200-YEAR SUPPLY COULD RUN OUT IN 20 YEARS OR LESS

Federal Estimates Overstate Reserves by Including Coal That Cannot Be Mined Profitably; Production Already Down in All Major Coal Mining States… And Utility Consumers Are Facing  Rising Energy Bill Prices.

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WASHINGTON, D.C. – October 30, 2013 – America does not have 200 years in coal “reserves” since  much of the coal that is now left in the ground cannot be mined profitably, according to a major new report  from the Boulder, CO-based nonprofit Clean Energy Action (CEA). The CEA analysis shows that the U.S. appears to have reached its “peak coal” point in 2008 and now faces a rocky future over the next 10-20 years of rising coal production costs, potentially more bankruptcies among coal mining companies, and higher fuel bills for utility consumers.

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