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A new report by As You Sow lays out the financial risks of continued reliance on coal for electricity generation.
The online case studies demonstrate how the financial risks highlighted in the white paper are manifested in individual electric utilities.
This white paper demonstrates that these risks combine to make current and future investments in coal-dependent utilities and coal mining companies exceedingly precarious.
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UPDATE
One week after the release of As You Sow's "White Paper: Financial Risks of Investments in Coal," reports in The New York Times raised questions about estimates of U.S. shale gas reserves and the economics of this unconventional natural gas, prompting calls from Congress for the U.S. Energy Information Administration (EIA) to justify its methodology for estimating shale gas reserves. EIA and natural gas industry participants dispute the claims that shale gas reserves are overstated. UBS Investment Research called the Times' allegations "overstated and misleading," noting that "the material resource potential from the gas shales are supported by studies from several independent organizations" and proved reserve growth is audited by independent engineers.
One of the key financial risks for new coal power plants identified in the white paper is that low priced natural gas is displacing coal-fired generation and will continue to do so. Given currently available data, we see no reason to revise this assessment.
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As You Sow has identified three primary risks for investors who have utility and mining companies in their portfolios:
- The unprecedented level of regulatory uncertainty. Existing regulations are being more strictly enforced as a result of litigation and the change of administration in Washington. New regulations in the pipeline will impart significant, unpredictable individual and cumulative costs on coal-reliant industries.
- Commodity risk due to volatile and rising coal prices and low natural gas prices. The changing nature of domestic coal markets and the prospect of future increases in the price of coal make its uncertainty as an inexpensive fuel for electricity production a new piece of the energy calculus in the U.S. Abundant supply and rapid price decline of natural gas in the U.S. has driven down power prices nationwide. This market condition is expected to persist for the foreseeable future.
- Increasing construction costs. Global price increases for construction materials due to new power plant construction in China and India have established a new floor for coal price construction. Domestic regulatory mandates, the age of the nation's coal fleet, and low power prices are driving decisions to replace the existing fleet of coal plants with other sources of power generation.
The clearest signal that the utility industry acknowledges these risks is the cancellation by public utility commissions and utilities of 153 new coal plants. The plant cancellations amounted to $243 billion in investment decisions being reversed, or disinvested, from coal in the past four years. In 2010, a growing list of utility announcements carrying the message of existing coal plant closures and plans for new natural gas plants and alternative energy projects continued the trend.
Footnotes
I. Urbina, "Insiders Sound an Alarm Amid Natural Gas Rush," The New York Times, 25 June 2011, available at: http://www.nytimes.com/2011/06/26/us/26gas.html?_r=1&ref=energy-environment .
R. Walton, "NYT Fallout: Industry Cries Bias; lawmaker calls for EIA to justify gas data," SNL Coal Report, 29 June 2011; "Industry, analysts rip newspaper's shale story," Platt's Coal Trader, 28 June 2011.
UBS Investment Research, Energy Sector, "NYT Shale Gas Allegations Seem Exaggerated," 27 June 2011, available at: http://www.anga.us/media/209887/ubs ny times response.pdf.
Sierra Club, "Stopping the Coal Rush," accessed 6 May 2011, available at: www.sierraclub/environmentallaw/coal/plantlist.aspx.
Based on National Energy Technology Laboratory cost of plant at $2500/kw, average plant size 600 MW: Department of Energy and National Energy Technology Laboratory, "Impact of Cost Escalation on Power System R&D Goals," National Energy Technology Laboratory, August 2008, p. 9, available at: www.netl.doe.gov/energy-analyses/pubs/Re-baselining%20for%20GPRA%20rev11.pdf.
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