Coal price hikes boost electric rates, more increases coming

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29 Apr 2008

Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year. There is an abundance of coal in the United States, but like many other commodities its price is increasingly dependent on events elsewhere in the world. Snowstorms this winter cut coal production in China and heavy rain flooded mines in Australia — the world's largest coal exporter. Meanwhile, demand for coal to generate electricity and make steel is rising almost everywhere, especially in fast-growing China and India.
That has increased the world's appetite for American coal, helping to push up the price of the fuel utilities burn to drive the steam turbines that generate half of the country's electricity. U.S. coal exports jumped 19.2 percent last year, according to the Energy Department, and are expected to rise another 15 percent this year.
"As more of the world develops and uses more energy, and supply tries to keep up with demand, we're going to have these pinch points," said Carol Pfeiffer, director of fuels for the U.S. for utility giant E.On AG.
Central Appalachian coal, a benchmark grade that's widely used by power plants, has jumped from around $40 a ton in early 2007 to almost $90 a ton now. Coal from the Powder River Basin in Wyoming and Montana, which has about three-quarters the heat content of Central Appalachian coal, jumped from less than $10 a ton to almost $15 a ton over the same time period.
Utilities must burn more Powder River Basin coal to generate an equivalent amount of energy, and it must travel east by rail, which adds significantly to its final cost. Utilities such as Columbus, Ohio-based American Electric Power Co., for instance, mostly burn Appalachian coal in their eastern plants, but rely on cheaper Powder River Basin coal in the west. Some American Electric plants are designed to burn only the types of coal they're near.
Facing such steep price increases, utilities nationwide are raising rates and are likely to push for even more dramatic increases in electric rates in the coming months. In parts of coal-dependent West Virginia, for instance, electricity rates will rise 15 percent this year. That's one of the biggest increases in American Electric's history, a rate hike the company attributes largely to rising coal costs.
West Virginia is far from alone. In Kentucky, which like West Virginia gets more than 90 percent of its electricity from coal, the four biggest utilities have raised rates an average of 12 percent over the past 12 months, according to the Kentucky Public Service Commission.
Pamela Earlywine, a single mother of two in Paris, Ky., says her monthly electric bill has risen about 20 percent since last year. "We'll just have to cut back even further," Earlywine said. "I'm already paying at least $30 more every month, so that changes my whole budget."
American Electric's planned 15 percent rate hike may not sound like much, but it means a bump of $900 a month for Twin River Hardwoods Inc., a small, rural West Virginia sawmill whose monthly electric bill is already $6,000. "That would hurt," said owner Tony Woodyard.
The national average retail price of electricity rose 2.3 percent last year, the Energy Department says. But in West Virginia, prices rose 4.6 percent. Energy research firm Global Insight expects rates to rise by 5.7 percent nationally this year, largely due to coal costs, and Stifel Nicolaus analyst Barry Bannister recently forecast that fuel costs will boost retail electric rates 69 percent by 2015 — more than double the increase of the last 10 years.
While states and utilities nationwide are taking steps to reduce their dependence on coal, the amount of the nation's electricity generated by burning it will actually grow to 54 percent by 2030 from 49 percent now, the Energy Department says.
Despite recent price increases, coal is still cheap compared to other fuels. In 2006, for instance, coal cost $1.69 per BTU, or British thermal unit — a measure of how effectively a burning fuel generates heat — according to the Energy Department. Natural gas, in contrast, cost $6.87 per BTU.
Some of the reasons coal prices are up, including the weather related disruptions in China and Australia this winter, will likely be resolved quickly. But other causes are more long-term in duration. Ports in Australia aren't adequate to handle growing demand, leaving ships lined up 30 to 50 deep waiting to load coal. South Africa faces similar transportation bottlenecks.
Demand for coal, meanwhile, is growing worldwide. China recently shifted from mostly exporting coal to mostly importing it.
In the U.S., transportation costs, rising wages and expensive new safety regulations have boosted the cost of mining coal. The prospect that Congress will pass laws sharply restricting polluting carbon emissions raises the possibility of even greater cost increases as producers spend on equipment and technology to cut emissions.
But until utilities face carbon restrictions, their biggest headache is coal costs.
In West Virginia, American Electric chalks up 54 percent of its recent rate hike to increased coal costs, and 32 percent to the rising expense of buying power from other companies — which is also more expensive due to rising coal prices. The remainder of the increase is to pay for equipment that will reduce coal plant emissions.
American Electric is able to limit its rate increase in West Virginia to 15 percent — even though coal prices have doubled recently — because, like most other utilities, it buys coal via a portfolio of hundreds of contracts that let it lock in prices. But as contracts expire, they must then be re-negotiated at rising rates.
Analysts differ on what coal prices will do next. Goldman Sachs' Michael Molnar thinks coal's price spike is due mostly to short-term factors and will encourage mining, which will bring down prices by bringing more coal to market. Citigroup Global Markets analyst Alan Heap disagrees, arguing that the short-term problems in coal hotspots like Australia and China highlight serious underlying problems with coal supplies.
For their part, utilities such as American Electric, E.On and Duke Energy Corp. see coal prices dipping slightly in coming months and years as supply constraints in Australia and Asia ease, but think growing demand will prevent prices from ever crashing back to last year's levels.
"There not a whole lot of reason why the prices would start to temper," said Chuck Zebula, senior vice president of fuel supply at American Electric.
That's bad news for consumers like Rodrigo Goines, 36, a disabled Lexington, Ky., resident whose government assistance checks barely cover his meager living expenses now.
"I'm not going to be able to afford it," Goines said. "If they keep raising these rates, I'm gonna be in trouble."

Source: The Associated Press