Conservative coal-price predictions could skew comparisons with renewable energy

When Xcel Energy’s plan for how it will provide power to Colorado was approved recently by the state, it was lauded by environmental groups as one of the greenest and most visionary plans in the country.

Even so, the company’s estimate for what it will pay for coal for the next few decades — which some environmentalists are calling inexplicably low — could distort future models that compare the financial viability of renewable energies to fossil fuels.

“According to Xcel’s data, they paid more for coal in 2007 than they predict they will be paying for coal in 2020,” said Leslie Glustrom, a Boulder resident who essentially runs a one-woman watchdog group that tirelessly prods Xcel to consider more renewable energy options. “For reasons that aren’t clear, it appears that the part of the company that predicts the coal prices didn’t consult with the part of the company that actually pays for the coal.”

Glustrom concedes that Xcel is leading the way toward sustainability for other utilities. The company’s resource plan, filed last November and approved by the Public Utilities Commission in August, calls for an additional 800 megawatts of wind power and another 25 megawatts of solar power. Already, Xcel is the No. 1 wind-energy provider in the country.

The plan also calls for taking two of the oldest coal-burning power plants — Arapahoe and Cameo — offline.

All this is good news, environmentalists say, but low-balling coal prices may lead Xcel to make poorly calculated decisions in the future about when — and if — it can economically retire its remaining coal plants. This week, Glustrom filed an appeal to the Public Utilities Commission asking it to reconsider Xcel’s coal-cost projections.

“The price of coal will have a strong impact on many of the analyses and calculations that are done in the coming years,” she wrote in the appeal.

The rising cost of coal

King Coal has long been considered a cheap and abundant domestic fuel. Coal-burning power plants are the backbone of the American electricity system, generating almost half of the country’s electricity last year. In Colorado, more than 60 percent of Xcel’s power comes from coal.

But in the last few years, both the “cheap” and the “abundant” assumptions have been challenged.

Between 2005 and 2007, coal costs at Xcel’s seven coal-burning power plants increased between 4 percent and 54 percent. The average cost of coal for Xcel across all plants rose 25 percent over those two years.

Rising coal costs are not unique to Colorado or to Xcel. Nationally, the price utilities paid for coal increased 5.3 percent from 2006 to 2007, according to the federal Energy Information Administration. The reasons for the increased costs include a growing global appetite for coal, which remains relatively cheap compared to oil and natural gas.

Severe snow storms last winter in China and floods in Australia both hampered coal production overseas and further tightened the global market, driving prices higher. In the United States, mining more coal often means moving more earth and going after deeper, more narrow seams — a costly undertaking.

For example, the Powder River Basin of Wyoming, where Xcel plans to buy the coal it needs to feed the new 750-megawatt Comanche 3 power plant in Pueblo when it comes online in 2010, is the largest coalfield in the country, containing 201 billion short tons of coal. This amount could, roughly, meet the country’s existing coal demand for nearly 200 years — if miners can get it out of the ground.

A report released by the U.S. Geological Survey in August lowered previous estimates of how much coal was recoverable from the basin, stating that only 10.1 billion short tons could be mined profitably under current economic conditions, or just 6 percent of the total.

Predicting the price

Xcel is required to submit a forecast for the price of coal to the Public Utilities Commission, a three-person panel that regulates utilities in Colorado. Its forecast starts in 2007 with a coal cost of $1.02 per MMBTU, or 1 million British thermal units, a measurement of how effectively a burning fuel generates heat.

But that baseline price is 18 cents less than what the company actually paid. The company’s forecast increases the cost by 2.3 percent or less annually, breaking even with today’s rates around 2021.

The model is derived from a combination of forecasts from four professional services, and the actual estimates from each company are proprietary and can’t be disclosed to the public, according to Xcel.

“We use a sophisticated model to go through the pricing process that we can’t second-guess,” said Tom Henley, Xcel spokesman.

Michael Mendelsohn, a senior policy adviser for Western Resource Advocates, suggested that Xcel redo its projection starting at today’s prices and attach a “volatility adder,” a cushion that accounts for expected swings in prices. Xcel is already using a volatility adder for its natural gas models.

“Coal has experienced dramatic increases in price and price volatility over the past several years, and this trend is expected to continue well into the future,” he wrote to the commission. “Coal markets are no longer domestic and stable, but rather are subject to dynamic international forces.”

The Public Utilities Commission did not so much disagree that Xcel’s predicted coal prices may be too low, as it agreed that coal prices don’t need to be that accurate.

“The impact of coal prices on resource selection is quite narrow, assuming that no new coal plant bids are submitted,” the commission wrote in its decision to approve Xcel’s plan. “We find that (Xcel’s) proposed coal prices are within the range of accuracy needed to properly model the anticipated non-coal resources…”

Both Glustrom and Mendelsohn disagree, arguing that the price assigned to coal will affect how good — or bad — renewable energy resources look in comparison.

The idea is similar to accurately modeling gas prices over the next decade so a consumer can decide if it’s worth the up-front cost to buy a more fuel-efficient vehicle. If the gas prices are modeled too low, then it looks less appealing to trade in the old gas guzzler.

Saved by the carbon tax?

Part of the fuzziness around whether accurate coal prices matter is the uncertainty about how a carbon tax or carbon cap-and-trade system will impact the cost of running a coal plant. Xcel’s resource plan also proposes using a $20-a-ton carbon dioxide price for future models.

“I think we need to continue to look at coal-price forecasts — there’s no doubt we’re seeing coal prices rise,” said John Nielsen, energy program director for Western Resource Advocates in Boulder. “But the carbon pricing that they’re using will have a significant impact — it’s my sense that is going to be a more significant impact on resource choice.”

And there’s more to it than just the price of coal versus natural gas versus wind.

Even if coal were to quadruple in price tomorrow, Xcel couldn’t just turn off its coal plants if it still wants people to be able to turn on their lights.

Until there is better technology to combat the intermittent nature of power from wind and solar, said Henley, the Xcel spokesman, coal plants will continue to carry the base load of energy in Colorado.

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