If the Environmental Protection Agency has anything to say about it, “King Coal” is about to be dethroned and banished from the realm.
For the past three years, coal has been under almost constant attack, the latest being EPA’s proposed rule on greenhouse gas emissions from power plants. When all the rhetoric is stripped away, this rule would essentially end the construction of conventional coal-fired power plants in America, exposing the administration’s “all of the above” energy strategy as actually just “some of the above.”
As any investor knows, putting all of your eggs in one basket is a risky proposition. Coal is an essential part of a diverse and reliable energy mix. It supplies nearly 40 percent of our electricity. And with the U.S. having nearly 250 years supply, coal is a secure form of energy that provides badly needed jobs (coal mining provides more than 85,000 U.S. jobs).
Also, there is no getting around that fact that coal has been among our most affordable fuels. In fact, the variation in the price of electricity from one state to another appears to have been influenced to a large extent by the share of electricity generated from coal.
Using data from the Energy Information Administration, we took a look at the average price of electricity in each of the 50 states for the year 2010. What we found was a fairly strong inverse correlation (-0.56 out of a perfect ±1.0) between power generation from coal and the price of electricity, meaning that those states that generated more of their power from coal tended to have a lower average cost of electricity compared to those states that generated less of their power from coal.
There are, however, two states that burn very little coal but have low electricity prices: Washington and Oregon. Both of these states depend on low-cost hydroelectric power for well over half of their electricity production. When the share of coal and hydropower—two technologies on the environmental groups’ hit list—are combined and compared to electricity prices, an even more robust correlation of -0.71 is the result. No other power source or group of power sources has such a strong relationship to price across the various states.
And this is not just a quirk of 2010 data. A strong inverse relationship between the share of generation from coal and hydropower and the price of electricity has been evident—in fact, was even stronger—going back to 1990.
The numbers for 2010 are stark. As the nearby table shows, in the 10 states with the lowest electricity rates, coal-fired and hydroelectric power plants generated 80 percent of the electricity, and the cost of electricity averaged about 7.0¢ per kilowatthour.
In contrast, in the 10 states with the highest electricity rates, coal-fired and hydroelectric power plants generated about 19 percent of the electricity, and the cost of electricity averaged about 14.6¢ per kilowatthour, more than twice as much as in the 10 lowest cost states. (For the 30 states in the middle, coal-fired and hydroelectric power plants generated 51 percent of the electricity, and the cost of electricity averaged 9.2¢.)
Obviously, there are many other factors that influence state electricity prices—whether companies operate in a competitive or non-competitive environment, regulations, availability of resources, and the like. However, as a predictor of electricity prices among the 50 states over the past two decades, it would be difficult to find a better measure than the share of electricity generated from coal and hydropower.
While greater coal and hydropower output have correlated well with lower electricity prices over the years, that does not necessarily mean that they will continue to do so. Natural gas prices are extremely low today, and it is has become an attractive option for base load power generation, especially as EPA continues to put the squeeze on coal. It should not surprise anyone if in the future greater generation from coal, hydro, and natural gas means lower costs to consumers.
Yet even as EPA is trying to end coal use in the United States, domestic producers are finding willing buyers overseas. From 2010 to 2011 alone, total coal exports rose by nearly one-third, and they are expected to continue to grow, especially to Asia. Indeed, from 2010 to 2012, the Energy Information Administration upped its estimate of U.S. net coal exports in 2025 by over 300 percent. Much of this coal is being used to manufacture goods cheaply that are then sold back to us.
Coal needs to remain an important part of our energy mix. It is plentiful, provides jobs, and has kept downward pressure on electricity prices in many states. New technologies have lowered its environmental impacts, but unreasonable regulation will close off this low-cost option and in the process leave us with higher electricity costs and less energy security.