London at night as viewed from the International Space Station

The fuel of the future is very different depending on where in the world you live.

The complex dynamics between three major global power generation fuels – coal, nuclear and natural gas, remain in flux. A recent event hosted by the Manhattan Institute in New York presented the options for a world balancing development with fears about resource scarcity, volatile markets and difficult-to-limit emissions growth from traditional and well-understood incumbent generation fuels.

Coal is the “Only Hope” for Many

Coal fired power may be the developing world’s quickest means of boosting access to electricity, and could be “fairer” than other forms of fuel, a coal company executive argued at the Manhattan Institute event.

An example of the disconnect that can exist between the developed world and emerging market nations with regard to power generation fuel sources was cited by Jacob Williams, Vice President of Global Energy Analytics at Peabody Energy. Williams recounted comments made by a
Tata Steel executive at an energy conference in India that boiled down to “how dare the United States intervene at the World Bank to block construction of a coal plant in India, when one-third of India’s population is without power?”

Coal’s outlook varies sharply by country, but is largely dictated by price. The head of the International Energy Agency‘s Gas, Coal and Power Division, Laszlo Varro, stated that coal faces problems in the US due to cheap, abundant natural gas – largely shale gas – and imminent regulatory constraints. Europe on the other hand, where shale gas is not currently produced and gas requirements are met by comparatively expensive imports with oil-linked pricing mechanisms, could be more likely to add coal-fired power generation capacity given the fuel’s relatively cheaper cost, in spite of its environmental drawbacks.

Asia is likely to continue leading the charge, building more new coal plants than any other region. Asia-Pacific coal consumption dwarfed the rest of the world, increasing by 9.1% from 2009 to 2010, according to the June 2011 BP Statistical Review of World Energy. The region also accounted for 67% of 2010 total world coal consumption.

The Cheapest Option for Struggling Economies?

The panelists all agreed that for utilities to make money selling electricity, fuel costs are a prime factor in their business strategies.

The US is in a situation where coal and natural gas prices are near parity, and Porter Bennett, Ponderosa Advisors President and former CEO of BENTEK Energy, believes this commodity price dynamic will endure for at least the remainder of this decade.

Jacob Williams of Peabody Energy suggested US natural gas prices need to be in the $4.50/mmbtu range for coal to be the clear “winner.” With gas currently trading around $2.50/mmbtu Williams does not believe companies will continue drilling for natural gas, which will reduce supply and lead to price increases over the medium term.

By comparison, natural gas currently trades for about $10/mmbtu in Europe and $15/mmbtu in Asia, making coal much more competitive. The two panelists disagreed over the prospects for global gas price convergence, with Williams envisioning a global gas price emerging within 10 to 15 years and Bennett taking a more skeptical view. Nevertheless, on a purely cost basis, coal is the cheapest power generation option in most major coal-consuming regions outside the United States.

The “Nuclear Option”

Only a few years ago, nuclear energy looked likely to enjoy a widely-discussed renaissance as it provided reliable baseload power with minimal emissions, but both the high-profile Fukushima accident and shifts in pricing for other fuels have impacted development.

Global nuclear development was broken down into “fast movers” like China and Korea; “slow movers” like the US; the UK and France; and “developers” like Vietnam, the UAE and Poland, according to David Diamond, Brookhaven National Laboratory Senior Scientist for global nuclear development.

From a cost perspective, the IEA’s Laszlo explained that because natural gas remains expensive in Europe – relative to the US – nuclear is “in the money.” In the US, however, adding greenfield nuclear capacity is much more expensive than coal or gas – with nuclear costing several thousand dollars per KW of installed capacity versus closer to $1,000/KW for the other two fuels, according to David Dismukes, Associate Director of the Center for Energy Studies at Louisiana State University.

Existing commodity price dynamics make natural gas the “safest play,” for building a new power plant. However, overbuilding gas-fired infrastructure could set the stage for considerable gas price increases over the longer term.

Unintended Consequences

With a wave of natural gas developments under way, building power plants fueled by other sources may become even more difficult, potentially creating problems of its own.

David Mohler, Duke Energy Senior Vice President and Chief Technology Officer, presented the US utility perspective. He stated that Duke recently completed construction on two coal plants, but these would likely be the last for a long time due to stricter environmental regulations and associated cost considerations. The current cost differential between new-build gas and nuclear, makes it extremely difficult for utilities to justify adding nuclear to their power generation portfolios. In fact, he described the cost of building a new nuclear plant – roughly $14 billion – a “bet the company” proposition.

In the US, gas is clearly the most-favorable option given existing economic, political and environmental conditions and that is exactly where the danger lies.

Mohler explained that betting on gas does not remove volatility from the equation over the long term and utility customers do not want their bills to fluctuate wildly. The potential for gas overbuild is a concern for Duke, which says it attempts to maintain a balanced generation portfolio and views any individual component rising above 30% of its total fuel mix as potentially problematic. The main concern for Duke – and many other US utilities – is making decisions based on current commodity prices and economics that risk unbalancing their generation portfolios. Over the longer term, changing dynamics and commodity price fluctuations, including more expensive gas, would hurt the utility and its customers.