Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20

Market Oracle FREE Newsletter


Washington's Gift to Coal as Democrats Plan to Subsidise Coal Industry

Commodities / Coal Jun 16, 2007 - 01:51 AM GMT

By: Elliot_H_Gue


When the Democrats took control of Congress at the beginning of 2007, many investors assumed coal would become a dirty word. After all, although the abundant fuel has many advantages, limiting pollution and carbon-dioxide emissions isn't one of them.

And Democrats have placed the global warming issue among their top priorities. The rhetoric out of Washington strongly suggests that Congress would like to pass some sort of federal carbon regulation or cap-and-trade scheme eventually.

It's ironic that despite all the talk of carbon regulation, prominent congressional Democrats are actually planning to hand investors in coal-mining firms a massive gift this summer--a package of subsidies, guarantees and direct cash payouts large enough to make even heavily subsidized ethanol producers jealous.

The package is spearheaded by such prominent Dems as Sen. Barack Obama and former House Majority Leader Dick Gephardt. However, that's not to say the Republicans aren't on board. The bill has actually attracted wide appeal on both sides of the aisle. In fact, it's perhaps even more widely supported among congressional Republicans.

The new Energy Independence Act is designed to promote the use of coal-derived liquid fuels and so-called coal-to-liquids (CTL) technology. For those unfamiliar with CTL, the basic process of converting coal into synthetic diesel fuel--Fischer-Tropsch (FT)--is named after the two German scientists who established it in the 1920s, Franz Fischer and Hans Tropsch.

FT has been employed on a large scale several times since its invention. The German military was starved of energy during World War II; Germany's comparatively large coal supplies were liquefied to produce a fuel.

During the apartheid years, South Africa was under an embargo and used FT-generated diesel fuel as a source of energy. Even the US at one time produced FT diesel in smaller-scale plants along the Gulf Coast; those projects were largely abandoned when oil prices dropped in the '80s.

At present, the total global capacity for FT diesel production of just 150,000 barrels per day comes from three operating plants. All of those plants are located in South Africa, which has retained its leadership in this technology.

The beauty of FT is that coal is an ultra-cheap fuel relative to oil. So, if you can convert plain old coal into expensive liquid fuel, the value of that coal rises almost tenfold.

I've long felt that CTL has wide appeal purely on economic grounds. The US has the world's largest coal reserves and could significantly reduce dependence on foreign oil with CTL fuels. Moreover, with oil prices above $40, advanced FT plants would be cost-competitive and proven technology already exists.

But the Energy Independence Act offers another catalyst for this investment theme and, more important, draws public attention to CTL. On May 29, an article on CTL made the front page of The New York Times . The paper detailed that one of the plans circulating through Congress is to offer loan guarantees for six to 10 major US CTL plants, a 51-cent tax credit per gallon of CTL fuels used until 2020 and additional subsidies should oil prices drop below $40.

The US Air Force even has plans to offer long-term contracts to buy as much as 1 billion gallons of CTL fuel per year; that's equivalent to around 40 percent of Air Force fuel use. Simply put, this package of subsidies is reminiscent of the subsidies currently given for ethanol. It's the sort of generous package that Washington just loves to put together.

The FT process is a closed reaction; that makes it easier to remove some pollutants, such as sulphur and mercury, from the coal during the process of converting it into fuel. Therefore, CTL fuels are cleaner in terms of sulphur-dioxide emissions than burning coal in a plant and, in many cases, even cleaner than conventionally produced fuel.

But there are potential concerns with reference to carbon-dioxide emissions, which is precisely why so many environmental groups are opposed to CTL subsidies. That said, there are ways around that problem.

It's theoretically possible to capture much of the carbon dioxide produced in the FT process. That carbon could then be stored permanently or even injected into mature oil fields to enhance production.

Despite opposition from some environmental groups, according to the Times , congressional Democrats would like to pass this subsidy bill by mid-July. This would be a major boost for a host of coal-mining firms and companies that manufacture CTL-related equipment.

And there are already signs of movement on the CTL front. Peabody Energy is the largest coal-mining firm in the US and has been the most aggressive in promoting and investing in CTL. The company recently announced a plan to pledge 1 million short tons per year of coal and a $10 million investment in an Illinois CTL plant. Peabody has also been among the most-vocal firms in lobbying Congress for CTL subsidy legislation.

Peabody has partnered with a smaller firm called Rentech on that firm's CTL plant. Rentech is a small company with an unproven technology; I've consciously not recommended this as a play on CTL, and I continue to prefer the larger and more-proven South African leader in CTL.

Beyond CTL

Of course, the investment case for coal goes far beyond CTL and bipartisan support for a new coal subsidy package this summer. Coal is the most-important source of power globally, and there's no way to replace it in any reasonable time frame.

Coal currently accounts for roughly 30 percent of global generating capacity; the Energy Information Administration projects that coal will roughly maintain that share in the next 23 years. Because electricity demand globally is rising quickly, maintaining that steady share for coal means a 79 percent jump in global coal-fired capacity during this time frame. And global coal capacity is already higher than for any other single type of plant.

But it's important to note that the figure above massively understates the importance of coal to the global grid. As I've highlighted before in this newsletter, there's a huge difference between capacity and generation: Just because a utility may own a plant with 1,000 megawatts of capacity doesn't mean that plant is operating at that capacity at all times. In fact, that's highly unlikely to be the case.

This brings us to the important distinction between baseload and peaking power. Baseload power refers to the base demand of electricity that needs to be available for around-the-clock usage. In other words, even at 3 am, there's some demand for power and generators must meet that usage.

Of course, power demand varies throughout the day. When demand exceeds baseload levels, generators fire up peaking plants to meet those surges of demand. This capacity can be shut down again when power demand slackens.

Although this is a slight overgeneralization, coal and nuclear plants are examples of common baseload capacity generators. Both types of plant can be run around the clock and produce predictable, continuously available electricity supply. In contrast, natural gas is often used in peaking plants.

Gas-fired turbines can be more easily and quickly switched on and off than coal or nuclear facilities; capacity can be quickly brought to bear when demand rises. But gas-fired power tends to cost more than coal or nuclear power; it's perfect for meeting those demand spikes but not for 24-hour generation.

Wind and solar power, at least in reference to the modern grid, aren't ideal baseload power sources either. That's because the power outputs from such plants aren't constant; those outputs depend largely on weather conditions in a given area.

The long and short of this is that baseload power plants are run more consistently and continuously than peaking plants. Therefore, the actual output from baseload plants tends to run closer to their maximum-rated capacity than for peaking plants.

This is why coal plants account for only 32 percent of US installed capacity but produce more than 52 percent of the nation's power. Meanwhile, gas-fired capacity in the US is more than 40 percent of total generating capacity; however, gas-fired plants account for less than 20 percent of US power output.

The key point to note here is that it's important to distinguish between a country's electricity capacity and actual output. Take Germany as an example. The country has aggressively built out its wind-power capacity during the past 15 years and is now aggressively supporting solar.


By Elliott H. Gue
The Energy Letter

© 2007 Elliott H. Gue
Elliott H. Gue is editor of The Energy Letter , a bi-weekly e-letter as well as editor of The Energy Strategist , a premium bi-weekly newsletter on the energy markets. Mr. Gue is also associate editor for Personal Finance , where he contributes his knowledge of the energy markets.

Mr. Gue has a Master's of Finance degree from the University of London and a Bachelor of Science degree in Economics and Management from the University of London , graduating in the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that university.

Elliott H. Gue Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


16 Jun 07, 10:59
When will coal run out

Actual wikipedia says that proven reserves are at 155 years whereas theoretically there is 600 years worth of coal available.

Terence Jackson
16 Jun 07, 12:50
Rentech and CTL

Mr Gue - a good read, but you are wrong in stating that Rentech is unproven. Do you honestly believe Peabody would agree to build multiple mine mouth plants and contribute $10 million and take a 20% option on a triple play plant (FT fuel,fertilzer, and electric power) which will start construction this year in East Dubuque, Illinois?

Check out where you will find how Rentech has built many pilot plants over the decades, one of which was of a commercial size.

Another pilot plant, a Project Development Unit, will be operational this year in Denver where all types of coal, catalysts and biomass will be analyzed for maximum performance.

Would Natchez, MS be allowing a 2.75 billion bond issue if they did not have faith in Rentech's process?


Terry Jackson

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules