Coal's history is a checkered one. Abundantly available but beset by environmental problems, coal's competitive strength in the future remains open to question.
When OPEC struck its first blow in late 1973 and early 1974, it was only natural that the country's hopes were pinned on coal. After all, the United States had an abundance of coal resources, in condition to be mined at low cost, and the technology to burn it was in place. So were means of transporting it. Moreover, compared with oil and gas, the industry was relatively unencumbered by regulation. Thus production could be boosted as the market required. It was on such premises that the president's National Energy Plan, issued in the spring of 1977, was based. The plan "would increase the use of coal in 1985 by the equivalent of 2.4 million barrels of oil per day (200 million tons per year) above the level without the Plan and 6.5 million barrels per day (565 million tons per year) above the 1976 level." That target would have translated into coal consumption of 1.1 to 1.2 billion tons in 1985, but reality failed to follow the script: the country burned only 818 million tons of coal in 1985, even though the price of oil continued to climb and the price differential between coal and oil widened.
Three factors upset the calculations. The first was that electricity demand, while holding up much better than oil or gas demand, did not rise nearly as fast as had been envisioned by the National Energy Plan. Conservation-mindedness, while not rampant, was pervasive. Second, nonutility demand for coal, far from steeply rising as anticipated in the plan, stayed essentially flat. Industry stuck with oil and gas, though consuming more electricity (and thus, indirectly, more coal). Third, coal-based synfuel failed to materialize.
What lies behind the lag in demand for coal? For one thing, many industries require a working environment free of contaminating coal dust, effluents, and the like. For another, because coal is bulky, coal handling and storage require space, and either rail or water transportation must be accessible. The burning of coal results in slag, which also requires storage—and eventually disposal—and again means space. Moreover, coal-burning has become subject to an uncertain regulatory environment, especially as regards air pollution. For these reasons, and also because strikes and strike threats jeopardize the continuity of supply, oil, gas, and electricity are preferable alternatives. Nor must one forget that for a variety of reasons the so-called smokestack industries, whose very name testifies to their connection with coal, have hardly been in the forefront of rapid growth.
Few will deny that coal is the dirty fuel par excellence.
These factors more than offset coal's patent advantages, such as an abundant resource base, a wide distribution of reserves, low cost per unit of heat, a known and proven technology of use, and an infrastructure in place. Most intriguing is that coal's use lagged while the price differential between the price of residual oil and that of coal rose steeply, from a ratio of 2:1 in 1973 to 3.5:1 in 1981! (The data used here are the cost of the two fuels delivered to steam-electric utility plants.) While that differential shrank briefly to as little as 1.2 percent in July 1986, it recovered to a range of 1.5:1 to 1.8:1 in 1988, but without notable impact on the fuel mix—a situation perhaps best explained not in terms of current prices but in terms of price expectations.
As noted, expectations about coal were disappointed: grossly in industry, less so in utilities, where slow but steady growth in the consumption of electricity caused slow but steady growth in coal consumption. In industry, the plan foresaw the burning of 360 million tons in 1985, while fewer than 120 were actually consumed. These trends have made coal a virtual hostage to the utility industry, which has become coal's primary customer by far. However, if one sees the latter as steadily moving ahead, and if one holds a dim view of the future growth of oil-, gas-, and nuclear-generated electricity, then coal's hostage position could be considered quite comfortable: slow but steady growth in the shadow of an energy form—electricity—with a strong past and presumably an equally strong future. Put differently, the fact that fully 85 percent of all domestically consumed coal now goes to the generation of electric power and that the share of coal in power generation seems well on its way to 60 percent can be seen as a source of comfort for the coal industry.
Still, those with long memories will caution that the history of coal is a history of ups and downs. Its path includes dominance of the mineral fuels market at the outset of World War I, dropping to half the market by the late thirties and to a mere 17 percent of it by the mid-1970s. In absolute terms, production peaked in both world wars. It reached a peak of 650 million tons just before the outbreak of World War II, from which it slumped so badly that it did not reach the same level until around 1970. Severe ups and downs in productivity, in employment, and in numbers of mines have characterized the industry. Will this continue?
The environmental threat
Few will deny that coal is the dirty fuel par excellence. From mining to combustion, it leaves its traces on land and in the air and water. While this is hardly a new phenomenon, it is only in the past three decades that governments have begun more actively to intervene on behalf of the environment, health, and safety. The earlier battles were fought largely over the ravages wrought on the landscape by strip-mining. Legislation regarding land reclamation and acid discharges into streams predominated (above all, the Surface Mining Control and Reclamation Act of 1977). The more recent emergence of environmental consciousness of air pollution shifted attention from the mine to the boiler. The National Environmental Policy Act of 1969 (NEPA) and the Clean Air Act of 1970 (and its amendments) were the initial responses, and were followed by other legislation and regulations. In all of these, coal was tagged as the primary villain. While it is remarkable testimony to the robustness of the coal industry that these developments were paralleled by rising coal consumption, one must keep in mind that the sharp rise in the price of oil, and subsequently that of natural gas, gave a significant leg up to the coal industry.
Until a year or two ago, acid rain—or to use its more accurate name, acid deposition—was the environmental issue. Nor has this issue lost its topicality. The extent and characteristics of acid rain are as controversial as ever, and perhaps more so, as new evidence and research apparently has slowed what once seemed a scientific convergence on the impact of acid rain. For example, an interim report issued in mid-1987 by the interagency National Acid Precipitation Assessment Program (NAPAP)—controversial from the moment it was released—questioned the alleged trend toward increasing pollution, more or less rejected the connection of acid rain to deteriorating forest health, and in general had an optimist cast to it. At the same time,the National Coal Association (NCA) called attention to the fact that in spite of steadily increasing coal consumption by utilities, sulfur dioxide (SO2) emissions have been declining (figure 1).
Figure 1. U.S. coal consumption versus SO2 emissions at coal-burning electric power plants
Enter global warming
Neither the NAPAP judgment nor the NCA statistics suggest that the acid rain problem is on its way out. Far from it. While declines in emissions per unit of coal consumption have more than offset the steady rise in coal consumption, the question is how long this trend can continue.
Even so, in the last twelve or eighteen months acid rain seems to have taken a back seat to another coal-associated environmental problem: climate modification, also labeled as the "greenhouse effect" or "global warming." The sudden leap of this issue to the front pages probably was linked to the hot summer of 1988. The public became receptive to the idea that such a phenomenon was more than science fiction, and the issue prompted congressional inquiry. During those hot summer days at least one respectable scientist gave the Congress to understand that there was a 99 percent probability that the greenhouse effect was here now. Others were more cautious and opined only that the weather record of the eighties was compatible with global circulation models, or, a bit more cautiously, was not incompatible with them.
There are important differences between the acid rain and greenhouse problems. Above all, it is quite feasible to cope successfully with acid emissions and their impact, probably at a cost that would not deal a significant blow to the demand for coal or its consumers. Technologies are even now moving from the development and demonstration phase to commercial deployment, fluidized bed combustion (FBC) and limestone injection being at the forefront. FBC facilities, which initially were very small installations of little use to utilities, are now approaching the 200-megawatt level and are thus suitable for incorporation in utility power plants. In ten to fifteen years a significant segment of coal-burning power capacity could well be of the "clean-coal technology" sort.
The greenhouse effect is a far more refractory problem. The CO2 generated is an unavoidable side effect which, in contrast to sulfur, cannot be captured by the addition of some other substance inside the boiler, nor can the gas, as it escapes into the atmosphere, be captured by anything on the surface. Moreover, there is not at this point any promising method for counteracting the role of carbon dioxide in impeding radiation of heat back into the atmosphere. As a counteractive measure, increasing the earth's reflectivity has been suggested, through such means as painting all roofs white or scattering white plastic chips on the ocean. Another remedy, absorption of CO, through enlargement of the world's forested areas, is a daunting prescription in the face of continuing deforestation (especially in the tropics) and the truly enormous acreage required.
The problem is real, large, serious, and complex. According to current best estimates, of the greenhouse gases CO2 constitutes only about half. Methane, which has various origins that are difficult to identify, measure, and control, is another such gas. Then there is nitrogen oxide, again from many sources, including both power generation and automobiles. There is ozone, and there are others still. The diversity of sources strains the resources of research and policy.
To focus on coal, the Electric Power Research Institute (EPRI) estimates that fossil-fuel power plants in the United States are responsible for about 28 percent of the country's domestically generated CO2 emissions, and that CO2 emissions from all U.S. sources account for about 26 percent of worldwide CO2 emissions. This means that U.S. power plants contribute just over 7 percent to worldwide CO, emissions (and half that percentage when other greenhouse gases are taken into consideration). If coal-burning power plants alone are considered, the numbers are even smaller.
Are these emissions small or large? There is no sensible answer to this question. The absolute numbers behind the percentages are forbidding. U.S. power plants emit just about one million tons of CO2 per day (compared with about 40,000 tons of sulfur dioxide). On the other hand, the U.S. contribution to emissions is relatively small: its coal-burning power plants are responsible for 3 percent of worldwide emissions of all greenhouse gases at most.
The competitive position of coal
What can we say about the current and prospective competitive positions of coal, as it faces these problems? Its steadily growing share in the nation's energy mix since the mid-seventies may be taken as prima facie evidence of coal's competitiveness in its major market, that of power generation. At least that was the unquestioned judgment until the collapse of oil prices in early 1986. When in the summer of 1986 the price of crude oil briefly plummeted to substantially less than $15 per barrel, there was concern in the coal community that the price differential vis-a-vis residual oil had narrowed sufficiently to threaten coal, and not only in marginal situations.
A calculation of the situation as of September 1986 showed coal at the utility gate selling for $32.50/ton (as a national average) on long-term contracts, and for $34.00 on a spot basis, with wide regional variations ($22.00 to $50.00). Oil was then selling at $18 per barrel, leading to the conclusion that at this price coal was competitive at $44 per ton—substantially higher than the national average (though near some regional coal prices)—which was a price level of concern to coal producers. With oil costing $10 per barrel, coal could compete only when priced no higher than $25 per ton, or substantially less than at the time quoted. The competitive threshold for oil at a price of about $15 per barrel would be in the range of $31 to $33 per ton of coal or about where coal was priced in the fall of 1986.
Little has changed since that time: the national average price of coal received by utilities was just below $31 in the first quarter of 1988 (again with wide regional variations)—close to what it was in 1986. With the recent oil price at about $15, coal is within the competitive range calculated above. At the even lower prices prevailing in mid-October 1988, it is well within that range.
But aggregates can be deceiving. If these calculations suggest that oil's low price allowed it to encroach upon the position of coal in utility fuel consumption, it is not evident in the statistics. As a share of total generation, the coal-based portion in fact varied little. It dropped slightly from 1985 to 1986, but it rose steadily from 55.7 percent in 1986 to 56.8 percent in 1987, and to as high as 58.1 percent in early 1988,settling again in the 55-percent range in mid-year. Oil had experienced a comeback of sorts in 1986, but this came on the heels of a particularly poor showing in 1985. Massachusetts, New York, and Florida accounted for most of the increase, as oil recaptured territory lost before 1986 to coal, gas,and nuclear power.
More important, oil is now a minor source of energy in the utility business, and year-to-year fluctuations are not very meaningful. Only about 5 percent of all steam-generated electricity is now oil-based. Thus major movements are excluded simply by the insignificance of oil as a utility fuel. Changes are caused by special situations of this or that power system or plant or unit, and this will continue to be the case unless and until utility executives can convince themselves that oil prices in the $12-14 range are a long-term proposition. That is a conviction hard to come by.
Important in assessing these trends is the extent to which plants are, in fact, in a position to burn oil. The numbers are roughly as follows: about 6 percent of U.S. power capacity can burn oil only; a bit more than 10 percent can burn both oil and gas; and less than 2 percent can burn either coal or oil. In the short run, then, utilities can switch to oil by utilizing more of their oil-burning capacity, and by doing some additional switching where dual-burning facilities exist; but the numbers suggest that there is not much elbow room either way.
"Impact of Lower Oil Prices on Utility Coal Use," a study released in mid-1987 by the International Energy Agency (IEA), throws additional light on the threat of low oil prices to coal. It assesses the likely degree of coal displacement in seventeen IEA countries under three different oil price scenarios: $10.00, $17.50, and $25.00. Among other things, the study finds that even under the $10 scenario, coal displacement by oil would be minimal and limited to the United States, Denmark, the Netherlands, and Spain.
The reason is not, however, that "the price is wrong." If the economic calculus were the critical variable, ten countries would experience coal displacement. However, other factors would impede this response: long-term contracts, government policies favoring coal use, taxes on fuel oil, high environmental costs imposed on fuel oil, strategic considerations such as diversity and security, among others. It should be noted, however, that this study does not consider the impact of fuel-switching in plants with dual-burning capacity.
The data and the underlying considerations suggest that in the short run, the displacement of coal by oil is probably not a significant matter, and that in the long run, the switch would be constrained by the availability of plants having dual-fired capabilities, by lack of conviction that low oil prices are here to stay, and by an array of policies favoring coal.
As for the competitive position of coal outside the utilities, its inability to penetrate the industrial market is a given. Consumption seems stuck at about 70 million tons of coal per year for all industries other than coke plants; the latter consume about 40 million tons year after year. It is difficult to envision any constellation of events under which the role of coal in industry would experience a significant revival.
On the contrary, the likely emergence of more severe environmental regulations is apt to prove especially burdensome to smaller industrial units and those located, as many industries are, near urban settlements. Nor can one count on a lasting improvement in the situation of the smokestack industries. Anyone familiar with metal demand, for example, is impressed by the slowdown, and in some instances the reversal, of growth rates. Thus one sees little encouragement for nonutility coal use.
What might change this situation? For one thing,a successful outcome of current research and development on clean-coal technology should make coal more acceptable to industry. Moreover, as these technologies are likely to show few if any scale economies, small coal-burning units might well appeal to small industrial operations. Continued government funding of the relevant R&D is thus not only well-placed for the utility industry (which via EPRI has lent its support), but carries wider meaning for the nation's energy future.
A different thought, heard recently in discussions of coal's future, addresses coal not so much as a fuel but as a feedstock for a variety of commodities. "Coal refineries" would produce solid, liquid, and gaseous fuel, chemicals, and a whole line of products now mainly derived from natural gas and oil. Such a development would give coal a highly diversified set of markets. It is something to think about in the long run, especially as oil and gas become more costly. There is also some imaginative thought being given to getting coal back into the railroad business. For the moment, though, coal will have to concentrate on shedding its image as the environmental villain. That won't be easy, but then coal has never had smooth sailing, and it now looks as if its up-and-down life-style is fated to continue.
Hans H. Landsberg is senior fellow emeritus in RFF's Energy and Natural Resources Division. This article was adapted from a paper presented in the Olin Distinguished Lectureship Series, Colorado School of Mines, October 7, 1988.
A version of this article appeared in print in the January 1989 issue of Resources magazine.
