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Coal Transportation Costs Could Hinder Resurgence of Coal Generation


Competition between coal and natural gas as the go-to fuel for electricity generation is expected to continue in the short term. According to the Annual Energy Outlook 2013 by the U.S. Energy Information Administration (EIA), natural gas prices are projected to increase more rapidly than coal prices and this may potentially allow existing coal plants to recapture some market share.

Over the past year, relatively higher natural gas prices have somewhat reinvigorated coal-fired generation in the U.S. However, the combination of looming environmental regulations and gas prices remaining relatively low compared to historical rates have kept the pressure on coal generators. The cost of transporting coal from mine to power plant constitutes a significant part of the price of coal. According to the EIA, more than 70% of the coal delivered to the electric power sector is transported by rail, and the average cost of shipping coal by rail in the U.S. has increased nearly 50% over the past decade.

Coal-transportation-CostsSource: SNL Energy and U.S. Energy Information Administration.

Railroads are now considering more flexible pricing terms and less strict obligations for minimum shipments due to the uncertainty in the U.S. coal market. According to a recent survey, railroad shippers anticipate an average base rate increase of 3.5% over the next six to 12 months, down from 3.8% in the previous quarter. CSX Corp. is implementing a new utility contract structure that splits the conventional rate into a fixed quarterly charge and a variable charge based on the quantity of coal moved.
Rail rates have a strong correlation with diesel prices, but each railroad has its own fuel adjustment scheme and in most cases have multiple options for fuel adjustments. BNSF Railway Co. and Union Pacific Corp. use the EIA's on-highway diesel price as the basis for determining whether a fuel surcharge will be implemented. An SNL Energy analysis of information reported by the EIA regarding on-highway diesel prices shows that prices in January 2008 were about $3.50 per gallon and increased gradually through the summer, peaking at $4.70 per gallon in July 2008. By March 2009, the price had dropped to $2.09 per gallon and had a significant impact on rail fuel surcharges. Thereafter, prices began rising again, reaching about $4 per gallon by the spring of 2011 and have since hovered near the $4 per gallon mark.

Estimated Coal Transportation Costs
SNL Energy estimates coal transportation costs based on reported fuel deliveries data from monthly EIA-923 filings. SNL's coal transportation cost methodology combines estimates of transportation rates with information on transportation routes from particular mines to power plants. Transportation rates are updated quarterly, consistent with rail carrier fuel surcharge filings and rail cost adjustment factor, or RCAF, estimates. The end result is an estimated dollar-per-ton amount for transportation costs associated with each coal delivery.

Coal transportation costs have seen an overall increase since 2008, in line with the increase in diesel prices. Weighted-average transportation costs for coal delivered to power plants in each of the nation's ISO/RTO regions illustrated that trend from January 2008 through March 2013, with the Southwest Power Pool (SPP) region experiencing the largest increase in average coal transportation costs, rising to $1.13/MMBtu in March 2013 from $0.73/MMBtu in January 2008. The majority of the coal burned at plants in SPP is delivered from the southern Powder River Basin (PRB).

CAISO, which receives most of its coal from the Uinta Basin, also saw a significant rise in coal transportation costs between 2008 and 2013, with the estimated average price up 53.5% during that period. MISO has seen a considerable rise over this time as well, with average transport costs increasing to $0.90/MMBtu in March 2013 from $0.63/MMBtu in January 2008.
ISO New England was one of only two regions that saw a decline in coal transportation costs between January 2008 and March 2013, decreasing by nearly 23%. Coal burned at power plants in ISO-NE plummeted by more than 75% between 2008 and 2012. The decreased coal demand may be playing a role in the region's lower transport costs.

The other RTO region that experienced a drop in coal transportation costs was PJM Interconnection. PJM has experienced the most coal retirements of any U.S. RTO from 2008 to 2012, which has decreased overall coal demand in the region. Plants in PJM have also decreased the quantity of coal purchased from PRB, which had higher transport costs due to the long distance across which the coal had to travel.

Transportation costs are an important element of coal plant costs and may account for 20% to more than 75% of total delivered costs, depending on the region. Since 2008, transport costs to plants in the SPP have averaged more than 50% of the total delivered cost. This could be mainly due to the region's plants buying low-cost PRB coal.

Transport costs in PJM averaged approximately 25% of total delivered coal costs between January 2008 and March 2013 — the lowest among all the RTO regions. This is largely due to most of the coal in the region being sourced from nearby northern Appalachia.

The highest transportation cost as a percentage of total delivered cost comes from coal sourced from the northern and southern PRB, which is mostly burned in plants located long distances from the mine source. Transportation costs for southern PRB coal, the majority of which is delivered to MISO, averaged $0.92/MMBtu in 2011 and comprised 48% of total delivered costs. In the first quarter of 2013, this figure rose to $1.13/MMBtu, with transport costs making up 57% of the total delivered cost.

Transport costs comprised the lowest percentage of total delivered costs for Illinois Basin coal in 2012, at 15%. Coal from the Illinois Basin is mostly burned closer to the mine source at plants in MISO.

Although transport costs made up 29% of delivered costs for central Appalachia coal in 2012, the average delivered cost of coal from central Appalachia was still the highest among all coal producing regions, as the cost of production is high.

Estimated Transport Costs from
Coal transportation costs to plants in New England were among the highest in the first quarter of 2013, averaging $1.21/MMBtu. Plants in the region source almost all their coal from central and northern Appalachia. The cheapest coal transportation costs in the first quarter of 2013 were for plants in the PJM portion of the Reliability First Corp. Most of the coal for the region comes from the nearby northern Appalachian region, for which transport costs to the region in the first quarter of 2013 averaged $0.49/MMBtu.

Plants in the central subregion take coal from various major coal producing regions, including central and northern Appalachia, the Illinois Basin, southern PRB and the Uinta Basin. Most of the coal in the central subregion is sourced from the Illinois Basin, and transportation costs averaged $0.29/MMBtu in 2012, increasing to $0.36/MMBtu in the first quarter of 2013.
Coal deliveries from northern Appalachia to plants in the central subregion saw the largest increase in coal transportation costs between 2012 and the first quarter of 2013. The average transport cost from northern Appalachia to the central subregion increased to $0.76/MMBtu from $0.60/MMBtu in 2012.

Deliveries in 2012 from central Appalachia to the central subregion had an average transport cost of $1/MMBtu, rising to $1.11/MMBtu in the first quarter of 2013.Transportation costs from the Illinois Basin to the central subregion also increased significantly between 2012 and first quarter of 2013, up nearly 24%.

Bucking the trend, transportation costs from the southern PRB to the central subregion averaged $1.27/MMBtu in 2012, decreasing to $1.15/MMBtu in the first quarter of 2013.

This article was provided courtesy of SNL Energy — a firm that integrates news, data and research in real time for the electric power industry. www.snl.com