Michigan Coal Trends, June 2011

By Frank Zaski

Key Trends and Facts 

1. The Delivered Price of Coal to Michigan Utilities Has Almost Doubled Since 2005

2. The US Delivered Price of Coal Increased Three Times Faster Than Inflation in Past 5 Years 

 3. US Coal Mining Productivity Peaked in 2000 and Declined 20% Since

 4. Transportation Accounts for 75% of the Delivered Price of Coal

 5. The Cost of Oil Has the Largest Impact on the Cost of Delivered Coal 

 6. Coal Dependent Regions Had the Highest US Electricity Price Increases Over the Past 5 Years

 7. Other Cost Pressures on Coal

 

The Delivered Price of Coal to Michigan Utilities Has Almost Doubled Since 2005

  • A common measure of the price of coal delivered to US utilities in dollars per million Btu (MMBtu) to account for the different coal Btu values.
  • In the past 5+ years, the delivered price of coal to Michigan utilities increased 84% from $1.58 per MMBtu in 2005 to $2.91 in March 2011.
  • Of concern is the rapid price increase in the past year.
  • Comparing March YTD 2011 to March YTD 2010, the price of delivered coal to Michigan utilities increased 18%, $2.24 to $2.63.  Other Midwestern states also had high increases: Indiana +14%, Wisconsin +20%.
  • Just comparing March 2011 to March 2010, the price of delivered coal to Michigan utilities increased 27% ($2.30 to $2.91).
  • Michigan has the highest delivered coal cost and the highest average retail price of electricity in the Midwest at 9.95¢ per kilowatthour.

One reason for the high costs is that Michigan is far away from Wyoming and Montana Powder River Basin (PRB) mines. Michigan utilities have experienced diesel fuel surcharges and replacement of very competitive long term rail transportation agreements that expired in December 2010. One example is a 13-years DTE contract which ended 12/2010. Here are more details to consider:

The US Delivered Price of Coal Increased Three Times Faster Than Inflation in Past 5 Years 

  • In comparison to Michigan, the US average delivered price of coal to US utilities increased much slower. It increased 54% from $1.53 in 2005 to $2.35 in March 2011. US inflation increased just 15% during the same period.
  • The March year-to-date 2011 price of delivered coal rose 3% from the same period last year in MMBtu ($2.35 from $2.27)  and in dollars per ton ($46.51 from $45.09).

US Coal Mining Productivity Peaked in 2000 and Declined 20% Since

  • According to the Energy Information Administration (EIA), improved mining technology and the shift toward more surface-mined coal promoted dramatic improvement in productivity from the Nation’s mines from 1978 through 2000 when an average 7.0 tons of coal was produced per employee per hour.
  • Since 2000, productivity has declined in most years to an average of 5.6 tons per person in 2009.
  • This 20% productivity decline happened in spite of improved technology, cost cutting efforts and more strip mining.
  • The biggest productivity decline, a 5.9% drop, occurred from 2008 to 2009 (the last year reported)
  • 2009 coal mining productivity dropped in all parts of the US especially for Western coal which dropped 9%. Of note: PRB surface mining productivity declined 7.5%, and Montana surface mining dropped 10.4%.
  • Most of the PRB coal mining productivity decline probably can be attributed to increasing overburden (the amount of dirt and rock above the coal seam). It appears the typical PRB overburden is about 200 feet thick and doubling to about 400 feet thick in 8 years – a productivity killer.

Transportation Can Account for 75% of the Delivered Price of Coal

  • The price of PRB coal from Wyoming has fluctuated from roughly $7 a ton to $20 a ton in the past 10 years.
  • In June 2011, the mine mouth price of PRB coal price was stable at $12.40 – $13.00/ton.
  • The rail rate for shipping PRB coal in 2010 is estimated to be 2.1 cents per ton per mile (Slide 26).
  • Assuming PRB coal is shipped (rail and boat) 1,600 miles to Midwestern utilities; the cost of transportation alone is $36 (a 2011 estimate).
  • Add the $12 PRB price to $36 transportation charges results in a delivered price of approximately $48.00 per ton. $36 divided by $48 = 75%.
  • The cost of PRB coal mine mouth is only 25% of the price of delivered coal.

This estimated transportation charge could be well underestimated. It does not reflect new 2011 contacts, recent diesel price increases and Burlington Northern’s attempt to recoup Warren Buffett’s overpayment for the purchase of all BN stock in 2010.

Only two rail lines ship PRB coal out of Wyoming, Burlington Northern and Union Pacific. They share the “Joint Line” which runs parallel to the Powder River Basin (almost a monopoly?). This is the busiest 100 miles of track in the world, carrying 130 trains per day.

The Cost of Oil Has the Largest Impact on the Cost of Delivered Coal  

  • It is estimated that the price of diesel fuel accounts for half of the price of coal transportation
  • The estimated $18 cost of oil (half of the $36 transportation charge per ton) is 50% greater than the cost of PRB coal cost of $12 per ton. (and diesel fuel is probably a big part of the $12 mine mouth price.)
  • The EIA conservatively forecasts the price of oil will increase roughly 3% a year faster than inflation (Inflation +2% a year, oil an additional +3%, equals +5% a year increase in the price of oil). Essentially, the price of coal may increase at a rate twice that of inflation (Source).

Coal Dependent Regions Had the Higher Electricity Price Increases Over the Past 5 Years

  • The retail price of electricity in the US increased 22% over the past five years ( from 8.1¢ in 2005 to 9.9¢ in 2010)
  • However, two regions very dependent on coal (and located further from PRB), saw their electric bills increase the most since 2005. East South Central (TN KY MS AL) saw their rates increase 34% (from 6.14¢ to 8.21¢) and East North Central (Michigan OH IN IL WI) had a 32% increase (from 6.87¢ to 9.09¢)
  • Regions less dependent on coal experienced smaller than average electric price increases. For example, Pacific coast +17% and West South Central (TX, AR, LA, OK) +3%.

Other Cost Pressures on Coal

In addition to peak coal and escalating delivery costs, their are other reasons the price of coal could continue to rise at a fast past:

  • US coal exports are increasing and putting upward pressure on coal prices. Exports of steam and metallurgical coal increased 38% in 2010. The largest export increase was to Asia (+176%) and particularly China (+400%).
  • China and India are buying US coal mines and a new coal-export port facility on the US West Coast.
  • As Appalachian coal fields are depleted, Eastern and Midwestern utilities are increasing their purchase of PRB coal. The increased demand will put upward pressure on the price of PRB coal and will also further increase rail congestion and costs for coal shipments.
  • The total cost of coal generation must include the damage caused by coal mining, burning and ash. These externalities include damaged health, premature death, lost productivity and damage to our environment. A Harvard study estimated these costs are an additional 17.84¢/kWh.
  • Increasing regulation of SO2, NOx, mercury and other pollutants
  • Environmentally progressive companies like Johnson Controls, Haworth, Steel Case and Wal-Mart have set high goals to reduce their carbon footprint. This will require their electric suppliers to produce less electricity using fossil fuels and more from renewable sources.
  • There is pressure to fund coal to liquid programs. Recently proposed GOP legislation includes a requirement that the Defense Department construct and operate a coal-to-liquids plant.
  • Utilities planning to burn petroleum coke need to consider that the price of delivered petroleum coke has increased 38% from 2009 to 2010 and increased 56% in the first quarter 2011 compared with the same period last year. At $3.09 per MMBtu, pet coke is even less of a value than March 2011 coal at $2.35 per MMBtu.

Mr. Zaski is a former member of the 21st Century Energy Plan Energy Efficiency Work Group, Michigan Climate Action Committee RCI TWG and the Midwest Governor’s Association Renewable Energy Advisory Group.  He recently participated as a panelist in the Hope Energy Forum, where he presented this information.

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