2.4

COAL

Coal is a major fuel used to generate electricity. About half of the electrical power in North America is generated from coal plants. While there are a number of industrial uses for coal, like making steel or providing raw materials for plastics, these applications are much smaller markets for coal than electrical power generation. Over 90 percent of the coal used in North America is used for generating electricity. Globally, coal generation accounts for over half of the world’s electrical generation capacity.

As a solid fuel, coal has different operating constraints than either oil or natural gas. For example, it is much harder to use a solid fuel in an engine. Something has to physically move the coal into the fire box—it isn’t like gasoline that can use a suction pump. Coal fires are also harder to start up and shut down than oil or natural gas fires. Natural gas or oil engines can be turned off by cutting the fuel supply. This isn’t the case with coal—any coal that is currently being burned will continue to burn for a while even after the engine is shut down.

One reason that coal is much cheaper than either petroleum or natural gas is because its potential uses are more limited. It is easier to make an internal combustion engine that runs off a liquid than a solid. Another reason is that coal mining is generally less complicated than either oil or natural gas drilling. Many coal mining problems can be addressed by applying additional brute force. For example, if more coal is needed, either new technology or longer working hours can be used to address the problem.

The major drawback of coal is the amount of pollution created when it is burned. Coal is the single largest source of air pollution in the world. Some of this is because coal is so commonly used, but another part of the problem is that megawatt for megawatt, coal produces more pollution than either oil or natural gas. As a result of this pollution, the coal markets are closely associated with market-based approaches limiting global climate change.

On a physical level, coal is a term that can describe almost any solid hydrocarbon. The actual composition of coal, everything from the heat energy that it contains to the amount of pollution that it releases when it is burned, varies substantially. In general, coal is a black or brownish black sedimentary rock that is removed from the ground by mining. Various types of coal are classified by the amount of heat energy they can produce as well as the amount of pollutants they contain.

Compared to other fossil fuels, coal is fairly easy to store and transport. It can be stacked into a pile and won’t evaporate or leak out of the bottom of a rail car. The most common method of transporting coal is by train. It is also fairly common for coal to be transported on barges and trucks. Since coal is typically traveling from mines to power plants, there isn’t a large consumer distribution system.

Even though coal transportation isn’t particularly difficult, it can be expensive. Since coal is cheap, even moderate transportation costs can make up a substantial portion of the retail cost of coal. As a result, it is common for coal-fired power plants to be located near coal mines. In other cases, unique technologies are built to transport coal cheaply. For example, coal pipelines can be built to link power plants to a continuous supply of coal from a distant mining location. To pass it through the pipeline, the coal might be crushed and mixed with water to form a slurry or compressed to form a solid log.

There is a limited international market for coal. The primary reason is that coal power plants are generally built close to an abundant local supply. Because transportation costs account for a substantial percentage of its final price, imported coal is typically much more expensive than local coal. As a result, it is usually uneconomical to transport coal over long distances.

Partially as a result of this, coal prices are much less volatile than the prices of other fossil fuels. The major consumers of coal are power plants that operate continuously throughout the year. They sign long-term supply contracts with nearby coal mines. It is fairly straight forward for power plants to stockpile supplies, and difficult for them to resell unused coal because there are few counterparties interested in coal trading. Power plants spend a lot of time optimizing their transportation from their local suppliers to minimize that aspect of their costs. Consequently, it is difficult for them to switch over to a different supplier on short notice.

The major influences on the price of coal are the price of other fossil fuels and environmental legislation. Prolonged periods of high oil and natural gas prices can make coal relatively more attractive for generating electricity. When prices for other fuels rise, coal power plants become comparatively more economical. This ultimately leads to an increased use of coal and higher coal prices. However, even when it goes up in price, coal generally stays much less expensive than oil and natural gas.

Market-based approaches to reducing carbon emissions and pollution also have a major effect on the price of coal. Because coal is heavily used and very polluting, it is the primary target of these regulations. These approaches seek to make it less economically viable to use coal as a primary fuel. Coal is heavily used as a fuel for producing electricity because it is cheaper than the alternatives. So, to reduce coal usage, most environmental initiatives operate by making coal-based generation more expensive.

Types of Coal

Because the chemical makeup of coal can vary substantially, it is usually classified based on how much carbon it contains and how much heat energy it can produce. The four main types of coal used for fuel are lignite, sub-bituminous, bituminous, and anthracite. Other varieties of coal exist, but they are generally not used as fuel. For example, graphite and diamonds are almost 100 percent carbon, and technically can be considered coal, but are neither easily ignited nor efficient to use as a fuel.

There is a trade-off between ease of ignition and energy content of coal. Low-quality fuel is easy to ignite but does not contain as much energy as higher quality coal. Higher-quality coals are harder to ignite but contain substantially more energy. Extremely high-quality coal, like graphite or diamonds, potentially contains a tremendous amount of heat energy. However, extremely high-quality coal is nearly impossible to ignite under normal circumstances. Coal also varies by the type of pollution that it contains.

•   Lignite. Also called brown coal or more colloquially as burnable earth, lignite contains the lowest energy content of any other fuel coal. It contains about 30 percent carbon and has a very high moisture content. As a result, it is often soft and crumbly. Its low energy density means that it is inefficient to transport over long distances, so it is almost never traded internationally. Unless stored carefully, it is subject to spontaneous combustion. The only commercial use of lignite is for power generation by nearby power plants. Compared to black coal, lignite contains an especially high proportion of pollutants, and its use is a politically charged topic. The only reason to use lignite is to provide a low-cost source of electricity.

•   Sub-Bituminous. The properties of sub-bituminous coal fall between lignite and bituminous coal. Sub-bituminous coal has a higher carbon content than lignite, about 40 percent, and contains more heat energy. Typically it also contains less moisture than lignite. As a result, it is slightly more efficient to transport over long distances, but there is still a relatively small international trade in this grade of coal. A little less than half the coal produced in North America is sub-bituminous. Sub-bituminous coal is used almost exclusively as a fuel for electrical power generation.

•   Bituminous. Bituminous coal has been subjected to high temperature and pressures. It is about 70 percent carbon. It is the most abundant type of coal found in North America and contains between two to three times the heat energy of lignite. There is an active international trade in bituminous coal, and it is used for both power generation and as a source for industrial raw materials. Bituminous coal is usually black, but it can also be dark brown. It commonly has striations of bright and dark material visible in the coal. About half the coal used in North America is bituminous coal.

•   Anthracite. The highest grade of fuel coal is anthracite. Anthracite contains about 95 percent carbon and typically has a hard glossy black surface. Anthracite ignites with difficulty but produces a steady flame once lit. Anthracite has low moisture content and produces relatively little pollution. It contains approximately the same heat energy as bituminous coal. Anthracite coal is much less common than bituminous coal, and its high price makes it uneconomical to use in power plants.

Sulfur Content of Coal

The second primary classification of coal is by its sulfur content. When sulfur is burned, the sulfur oxides that are released into the atmosphere combine with water to form sulfuric acid. Along with carbonic acid and nitric acid, sulfuric acid is one of the main components of acid rain. However, the danger from sulfuric acid is not limited to rain. Almost any liquid runoff from a coal mining facility or coal-burning power plant will be somewhat acidic. Over time, this tends to kill nearby plants and wildlife. Power plants that use high sulfur coals generally have higher maintenance costs than ones that use low sulfur coal.

Sulfur oxide emissions are an example of a localized pollution problem. When sulfuric acid is present in small quantities, it is not harmful to plant or animal life. However, when it is allowed to build up over time, it can reach a critical mass where species start dying off. As a result, the areas directly surrounding coal mining and coal power plants, downwind of the plants, or downstream from the plants, are at the highest risk. Farther away, the magnitude of the problem becomes less severe. Acid raid isn’t dangerous in small concentrations.

When coal contains sulfur, the sulfur usually comes in one of two forms. Most commonly, sulfur is found combined with iron to form pyrite crystals that are scattered throughout a coal vein. Pyrite is a yellow crystal sometimes called fool’s gold. Alternately, sulfur can also be found chemically combined with the carbon in coal, named organic sulfur. Pyrite can be removed prior to burning the coal, but organic carbon requires installation of scrubbers on the exhaust stacks of power plants.

Pyrite is heavier than coal and the majority of it can be removed by crushing the coal and submerging the combination of coal and pyrite in water. Coal will float to the top of the water, and the pyrite will sink. This process is called coal washing. This is a relatively simple process. However, it can have a high cost since the coal needs to be dehydrated prior to being burned. In some cases, there may only be a nominal incremental cost to washing the coal. For example, washing may have a low incremental cost if the coal is already being crushed, mixed with water, and transported in a slurry pipeline.

Removing organic sulfur from coal is substantially more complicated. It requires installing scrubbers on the exhaust stacks of coal-fired power plants. This process is known as flue gas desulfurization (FGD). A coal scrubber uses lime or limestone to remove sulfur dioxide emissions. Lime is a base that combines with acid to form a neutral product. The lime is mixed with water to form a mist that is sprayed across the top of the smokestack. When sulfur oxide gas rises out of a smokestack, it combines with the mist to form a solid byproduct called gypsum. Lime scrubbers can remove between 90 and 97 percent of the sulfur being emitted from a power plant.

Gypsum scrubbers can be very expensive to install and maintain. Since a solid byproduct is being formed, it is necessary to build ledges or shelves inside a smokestack to catch the falling residue. It is also necessary to clean out the residue on a regular basis. Generally, this means that the power plant needs to go offline throughout the year for maintenance.

Coal and the Power Grid

In addition to pollution, coal power plants play an important role in another major problem facing the energy markets—the reliability of the transmission grid. Coal power plants benefit from economies of scale. The bigger the plant, the less fuel is required to produce the same amount of electricity. However, large centralized power plants require elaborate long-distance transmission systems. Coal-fired generators are not the only power plants that benefit from a substantial economy of scale (nuclear power has a similar issue), but, historically, they have been the primary power plants used in the electrical industry.

When electric power was first being introduced, the two major advocates were Thomas Edison and George Westinghouse. Thomas Edison advocated using direct current (DC) power to transfer electricity from the generator to the consumer. The major problem with Edison’s DC power was that the voltage on the power lines dropped as it traveled farther away from the generator. There is no efficient way to step voltage up or down in a DC transmission system. This means that small local generators would need to be built close to the end-users.

In contrast, George Westinghouse advocated using an alternating current (AC) system invented by Nikola Tesla. With the Westinghouse system, transformers could be used to step-up or step-down the voltage multiple times. This enabled a single large power plant to supply power to a wide area. It also enabled a single power plant to support different types of customers. For example, high-voltage power could be supplied to industrial sites, and lower-voltage power supplied to residential consumers. The greater efficiency of large generation plants tipped the scale toward AC power. As a result, AC power has become a universal standard for electricity transmission.

For most of the twentieth century, behemoth power plants were built a long way from consumers. Extensive transmission networks had to be constructed to transmit power from these outlying generation plants to get that power to customers. Unfortunately, there is a trade-off between the cost of generating power and the cost of transmitting it. North America is now experiencing problems with the complexity of its transmission grid.

When transmission systems are simple, they are relatively inexpensive and reliable. However, when they get complicated, they get progressively more expensive and less reliable. In the first 50 years after electricity was introduced, electrical generation faced a different set of problems than it does today. Historically, electrical power was used primarily for lighting and urban population density was lower. As a result, transmission systems were relatively simple. Over time, as more electrical appliances were introduced and the population increased, the transmission systems became more complicated. This has made the transmission grid more expensive and less reliable.

Coal Mining

There are two main methods of mining coal—surface mining and underground mining. Both types of mining create environmental problems. Of the two, surface mining is simpler and requires fewer miners. However, the highest-quality coal is usually located deep underground.

•   Surface Mining. Also called strip mining, surface mining is the easiest way to mine coal when the coal deposits are located close to Earth’s surface. The first step in the process is to remove the topsoil and rock on top of the coal. The groundcover and topsoil can usually be removed through fairly standard earth-moving equipment like bulldozers. The rock layer is more difficult to remove. It must first be cracked through the use of explosives, and then shoveled out or excavated. In general, strip mining uses equipment that is fairly similar to standard excavation equipment, built on an unbelievably large scale. The primary economic factors affecting surface mining are the amount of coal available and the amount of earth that needs to be removed.

In most cases, after an area is strip-mined, it is contoured. Then, the topsoil is replaced and the area replanted with groundcover. Historically, strip mining gained a bad reputation for blighting the environment. This is much less of a concern currently when mining companies are required to restore the land that was used for mining. Surface mining is common in the Midwestern and Western United States.

•   Underground Mining. When the coal is too far underground to be removed by surface mining, tunnels need to be dug into the ground. Miners create a series of underground rooms to work in. Modern mining makes use of continuous mining machines that move up and down large faces of coal (approximately 50 feet in length). Although underground mining is now a highly mechanized process, it remains fairly dangerous. Because material is being physically removed from the ground, coal mines constantly face the danger of a collapse. Whether a mine collapses purposefully (to prevent a problem later) or accidently, the land on top of it will be destroyed and need to be restored. In the United States, most underground mining occurs in the Appalachian Mountain range east of the Mississippi River.

Coal Trading

Coal can be traded on both exchanges and in the over the counter (OTC) marketplace. Because of the close relationship between coal mining companies and electrical power generators, the coal market works a bit differently than other energy markets.

The only type of coal available for trading by individual investors is high-grade coal that it might be worthwhile transporting over a long distance. It really isn’t possible to speculate on the relationship between different grades of coal. Most of the time, low-grade coal is never transported far—it is always used near where it is mined. Additionally, there isn’t an active financial market to trade the location of coal. Unlike natural gas where transportation trades are common, there are limited opportunities to make coal transportation trades. In general, no one wants to transport coal over long distances so there isn’t a lot of trading.

Another limitation on coal trading is the weak relationship between electricity prices and coal prices. The primary use for coal is electrical generation. However, except in limited cases, the prices of electricity and coal are not correlated. Electrical power prices are usually determined by the most expensive fuel in a region rather than the cheapest. The only traders that can actually benefit from the spread between coal and electricity prices are the investors that own coal-fired power plants.

Historically, coal prices are much less volatile than other energy commodities on a price per energy basis. Coal, being relatively easy to store, does not have a strong seasonal price trend. Additionally, coal prices tend to be substantially lower than both natural gas and diesel prices (Figure 2.4.1).

Figure 2.4.1 A comparison of fuel prices

Location of Coal Deposits

Worldwide coal reserves are concentrated in the Northern Hemisphere. In particular, the United States and Siberia have vast coal deposits. There is a relative lack of coal in Western Europe, South America, and Africa (Figure 2.4.2).

Figure 2.4.2 Locations of coal reserves

Compared to other energy commodities, the global market for coal is relatively small. About 80 percent of the coal produced worldwide is used close to where it is mined. The cost of transporting coal as a percentage of its total cost effectively divides coal trading into two regions—an Atlantic market and a Pacific market. In the Atlantic, coal is imported into the United Kingdom, Germany, and Spain. In the Pacific market, coal is imported into Japan, Korea, and parts of China. About two-thirds of the international coal trading occurs in the Pacific.

Coal-Producing Region

Appalachian Mountains

The Appalachian Mountains are a major source of high-quality coal and produce about a third of North America’s total output. These mountains are located in the eastern part of the United States (Figure 2.4.3). The region is characterized by large underground mines that produce high-quality bituminous coal and anthracite. West Virginia and Pennsylvania are the largest coal-producing states in the region and have a long history of coal mining. Unlike western strip mines, which are open to the sky, mines in this region are dug deep into the Appalachian Mountains, forming extensive cave complexes.

Figure 2.4.3 Appalachian coal reserves

(Source: U.S. Energy Information Administration)

Coal-Producing Region

Wyoming

The western United States is the single largest coal-producing region in the country. This region, centered in Wyoming (Figure 2.4.4), is characterized by extremely large surface mines. In this area, very thick bands of coal, sometimes 40 or 50 feet deep, lie close to the surface. These mines produce low sulfur, low ash sub-bituminous coal that is used to provide fuel for power plants throughout the central United States. Some of the largest surface mines in the world are located in this area. This region accounts for about half the coal produced in the United States.

Figure 2.4.4 Wyoming coal reserves

(Source: U.S. Energy Information Administration)