Lumps of Coal for Christmas: Coal inventories plunge to lowest levels in 50 years ahead of winter
Utilities scramble to stockpile coal as power plants run short
“The solution to low prices are lower prices; the solution to high prices are higher prices.”
When it comes to energy markets, that adage rings as true as ever. The concept being prices are self-correcting features within a free economy. High prices increase investment in supply, create demand destruction, leading to a break in prices. Conversely, low prices will drive down supply, entice bargain demand, resulting in eventual price recovery. They’re the natural market mechanisms at work.
With coal and natural gas, this has been somewhat “more eventual” than anticipated. The onset of fracking crushed the coal industry. The price for per MMBTU of natural gas remained stubbornly stuck between $2-4 for much of the 2010s. This resulted in the acceleration of coal power plant retirements across the country. Not only were utilities racing to secure tax subsidies for renewables, the economics of coal were no longer making sense. Chronically low natural gas prices were keeping coal power plants out-of-the-money to remain competitive.
I’ve written a primer on the US power grid before if interested. Simply put, electricity supply must meet demand every second of the day, and done so at the lowest cost possible. Cheap natural gas fuel cut into coal electricity output. This accelerated the retirement of coal power plants nationwide.
Coal fell out of favor quickly. Many producers went bankrupt. The industry shrank. ESG investing shifted capital away from carbon intensive industries. Many coal producers found it impossible to secure financing as banks shut their doors. These series of actions have led us to where we are today: not enough coal and rising energy prices. Low energy prices are self-correcting upward.
Last winter, extreme cold crippled the central US’ energy infrastructure. This led to the largest controlled blackouts in American history. Natural gas prices spiked to unprecedented levels, bankrupting Texas’ oldest utility cooperative. Ahead of the winter heating season, autumn natural gas prices took off to their highest levels in years. As a result, coal realized a renewed sense of being. Coal power plants are now minting small fortunes—a welcomed change to an industry in secular decline.
Years of antagonism have taken their toll, though. The coal industry is a shadow of what it once was. Inventories plummeted to 50-year lows this past November, falling to levels not seen since the early 1970s.1 Low prices are finally bearing fruit—coal prices are seeing their best year in over a decade. An encouraging sign for the industry as coal is back in vogue economically.
The market mechanism may be broken, however. The social ostracism of coal permanently damaged its prospects. Not a single coal power plant is in the US pipeline to be constructed. What we have left must satisfy an important and significant niche going forward. Getting the coal itself may be the problem.
Entering this winter, we may be sleepwalking into another energy crisis. Polar temperatures locked up our natural gas system across the Great Plains and Midwest back in February. The largest US power grid operator, PJM, announced it will direct coal plants to shutdown and conserve coal when on-site supply dips to <10 days. This emergency procedure runs through April 1, 2022.2 Many are reporting ominously low stockpiles ahead of the winter months.
It’s not all doom and gloom. Utilities were diligent in refilling gas storage facilities across the country throughout the summer. Events like this past winter likely made us over-prepare for the 2021-22 heating season. We may catch a break and weather conditions be mild.
Not all is dire with coal plants, either. The ones located near mines where they literally have conveyers from the mine to the power plant are in the best shape. Where I see issues are those coal generators relying on long haul rail. Coal power plants in the Midwest far from Appalachia mines or the Wyoming Powder River Basin are most at risk of shortages. Wholesale electricity markets such at MISO and PJM appear more exposed to fuel supply constraints. They’re physically the most dependent on coal rail. In addition, those markets are much more coal-heavy than others.
It seems this winter our utilities will be contending with unusual headwinds. Coal power plants historically stockpiled 60 days of fuel. Nowadays, that’s the exception than the rule. Who knows, maybe we’ll be lucky this year. We might just be grateful for Santa delivering a few more lumps of coal this Christmas season. Hopefully, they just make it to the ones who need it.
Dezember, Ryan. November 30, 2021. “America’s Power Plants Are Low on Coal.” Wall Street Journal. https://www.wsj.com/articles/americas-power-plants-are-low-on-coal-11638268201
PJM Inside Lines. October 20, 2021. “PJM Adopts Temporary Manual Changes To Address Global Fuel Supply Issues.” https://insidelines.pjm.com/pjm-proposes-temporary-manual-changes-to-address-global-fuel-supply-issues/