I don't pretend to follow the coal market to any great extent. No one can keep track of everything. However, as I was reading an article in today's Wall St. Journal on the impact of the current Australian flooding on US coal exports, and another in the Financial Times concerning the implications of the timing of the floods for annual coal contract pricing, the dots seemed to connect. It struck me that all other things being equal, higher coal prices ought to be positive for natural gas, the main substitute for coal in electric power generation, while also giving renewable power a shot in the arm. That couldn't come at a better time for US wind power developers and the wind turbine manufacturers that supply them, many of whom are coming off a bad year.
As the Journal points out, the Australian state of Queensland is the leading exporter of the coal used in making steel. With much of Queensland under water, US coal exporters are finding a ready market for their output, with exports expected to surge by 10% this year. Although metallurgical coal represents a different segment of the market than the thermal coal that goes into power plants, the internationally-traded market for the latter has also tightened considerably, with prices well above $100 per ton, and apparently above their 2008 record levels. Nor is this solely the result of the Australian floods. Despite coal having fallen into disfavor in the US, its global fundamentals remain strong, supported by robust economic growth in developing countries that rely on it as a source of cheap and reliable power generation. China's coal demand has nearly tripled since 2000.
The first beneficiary of higher coal prices ought to be natural gas. The competition between gas and coal is complex, depending on the interaction between demand and available generating capacity in regional power markets. However, between 2007 and the most recent 12 months for which EIA data are available, the overall share of gas in US power generation increased from 21.6% to 23.7%--even as total electricity demand declined by about 2%--while coal's share fell from 48.5% to 45.4%. Much of this shift has been facilitated by the effect of expanding natural gas production on the price of gas into the power sector. The total share of non-hydro renewable power also grew during this interval, from 2.5% to 3.8%, even though intermittent sources like wind and solar power are likelier to compete head-to-head with gas-fired generation, rather than coal. So if renewables were taking share from gas, as a result of federal renewable energy incentives and state renewable portfolio standards, then gas was taking even more share from coal.
Today's high coal prices ought to support the continuation of that dynamic. While more expensive coal might not lead directly to the construction of more wind farms, it should certainly push up prices for baseload and mid-load electricity, making gas more competitive in those segments. That ought to boost gas prices, in turn making renewables more competitive with gas. Add in the return of some of the electricity demand that disappeared during the recession and developers of wind and solar projects should see increased interest from utilities in signing long-term power purchase agreements (PPA) for their output. The lag in PPA interest and weak financing environment were big factors in last year's lull in US wind turbine installations, which appear to have been the lowest since at least 2007, at roughly half the record level set the previous year.
That disappointing performance came in spite of the industry's receiving $3.2 billion in Treasury renewable energy cash grants, which were extended with much fanfare for another year as part of the lame duck tax compromise. Anyone expecting the extension of these incentives to lead to a surge of wind turbine installations this year was paying too much attention to their own PR; the best the industry could realistically have hoped for in the extension was to avoid falling off a cliff. However, if coal prices remain strong for the balance of the year and the economy continues on its current pace of recovery or improves on it, then the combination of all these factors just might contribute to a healthy rebound for wind.