pb coal study

8/8/2019 PB Coal Study

1/53

Coal Price & Availability Study

Report for the Electricity Commission

SEPTEMBER 2009

Prepared By:


2/53

PARSONS BRINCKERHOFF

PBQuality System:

Document Reference : 153015A Coal Study Report v006 final.doc

Report Revision : 006

Report Status : Final

Prepared by : Neil Wembridge, DaveBurbidge, Ross Wildes

Reviewed by : Nick Barneveld

Approved by : Nick Barneveld

Date Issued : 10 September 2009

Over a Century of Engineering Excellence Quality Management System Certified to ISO 9001: 2000

DISCLAIMER NOTICE

Report for the Benefit of the Electricity commission

This report has been prepared exclusively for the benefit of the Electricity Commission.PB New Zealand Ltd (PB) will not be liable to any other persons or organisation andassumes no responsibility to any other person or organisation for or in relation to anymatter dealt with or conclusions expressed in the Report, or for any loss or damagesuffered by any other persons or organisations arising from matters dealt with orconclusions expressed in the report (including without limitation matters arising from anynegligent act or omission of PB or for any loss or damage suffered by any other partyrelying upon the matters dealt with or conclusions expressed in the Report). No personor organisation other then the Electricity commission is entitled to rely upon the Reportor the accuracy or completeness of any conclusion and such other parties should maketheir own enquiries and obtain independent advice in relation to such matters.

Reliance on Data

In preparing this Report, PB has relied on information supplied by and gathered from anumber of sources including public domain and proprietary data services, internet sites,news services as well as parties involved in the industry. Any projections are estimatesonly and may not be realised in the future. No blame or responsibility should beattached to any of these sources for any factual errors or misinterpretation of data in theReport. PB has not independently verified the accuracy of this information and has notaudited any financial information presented in this Report.

Limitations

This Report covers technical data relating to coal prices and availability and is based onthe facts known to PB at the time of preparation. This report does not purport to containall relevant information on coal reserves and prices. PB has made a number ofassumptive statements throughout the Report, and the Report is accordingly subject toand qualif ied by those assumptions. The uncertainties necessarily inherent in relying onassumptions and projections mean that it should be anticipated that certaincircumstances and events may differ from those assumed and described herein and thatsuch will affect the results.


3/53

Coal price and availability

PB Report for the Electricity Commission

PARSONS BRINCKERHOFF Page i

Contents

Page Number

1 Introduction ..................................................................................................................... 11.1 Background 11.2 Tasks 1

2 Key drivers of coal price ................................................................................................. 22.1 Introduction 22.2 Global coal demand and supply 32.3 Availability and prices of substitute fuels 52.4 Technology developments 72.5 International policy settings 102.6 Carbon Emissions Trading Scheme (ETS) effects 112.7 Australias Carbon Pollution Reduction Scheme (CPRS) 132.8 The international coal market 152.9 Domestic coal demand 182.10 Domestic reserves and production 222.11 Domestic costs and prices 232.12 Net result: Domestic production, imports, exports and prices 24

3 Coal and oil price relationship ..................................................................................... 283.1 Introduction 283.2 Historic price trends 283.3 Current price trends 293.4 Substitution value 30

4 New Zealand coal price and availability projections ................................................... 314.1 Introduction 314.2

Modelling 31

4.3 Base case results 344.4 Scenario analysis 354.5 Lignite modelling 394.6 Summary 41

5 Glossary ......................................................................................................................... 425.1 Definitions 42

List of tables

Table 2-1 Domestic reserves by rank and region, PJ, 2001 22Table 2-2 Production by rank and region, PJ, 2008 22Table 2-3 Determinants of domestic coal prices 24Table 4-1 Base case assumptions 34Table 4-2 Increased coal demand case assumptions 36Table 4-3 Reduced coal demand case assumptions 37Table 4-4 Demand shift up: Case assumptions 38Table 4-5 Demand shift down: Case assumptions 39Table 4-6 Lignite modelling assumptions 40


4/53

Coal price and availability

PB Report for the Electricity Commission

PARSONS BRINCKERHOFF Page ii

List of figures

Figure 2-1 World coal demand figures (2002 to 2030) 4Figure 2-2 NZ quarterly gas production 6Figure 2-3 World recoverable Coal Reserves as of January 1, 2009, billion short

tonnes 16Figure 2-4 Coal consumption by sector, Gross PJ, 2000-2008 18Figure 2-5 Coal consumption shares by sector, 2008 19Figure 2-6 Net electricity generation by plant type, GWh, 2000-2008 20Figure 2-7 Net electricity generation by plant type, GWh, 2008 20Figure 2-8 Coal consumption by the other transformation sector, gross PJ, 2000-2008 21Figure 2-9 Solid energy coal resources and costs, by region, 2005 23Figure 2-10 Domestic coal production, exports, imports and consumption, Gross PJ,

2000-2008 25Figure 3-1 Coal, natural gas and oil price index changes, 2000-2008 29Figure 3-2 Coal conversion potential 30Figure 4-1 Base Case: Price-availability supply curve 34Figure 4-2 Base Case: Domestic supply and price 35Figure 4-3 Increased coal demand case: Domestic supply and price 36Figure 4-4 Reduced coal demand case: Domestic supply and price 37Figure 4-5 Demand shift up: Domestic supply and price 38Figure 4-6 Demand shift down: Domestic supply and price 39Figure 4-7 Lignite: Domestic supply and price 40Figure 4-8 Scenario supply quantities 41Figure 4-9 Scenario price paths 41

List of appendicesAppendix APrice and availability modelling data


5/53

PARSONS BRINCKERHOFF Page 1

1 Introduction1.1 Background

The following paragraph is taken from the email received from the Electricity

Commission, dated Tuesday 9th

June 2009:

The Electricity Commission's (Commission) Generation Expansion Model is

capable of providing least cost build schedules of new power stations under

various scenarios. To date, the cost and availability of coal has been fixed

across the generation scenarios at $4/GJ. In addition, unlimited quantities are

assumed to be available at this price over the entire modelled time horizon,

which is usually 30 years. In view of refining the assumptions for the next grid

planning assumptions, the Commission needs advice on coal availability and

price

1.2 Tasks

In order to provide the required information to the Commission, this study has

been divided into three main tasks. Task 1 Describes the key drivers of the coal price.

Task 2 Describes the relationship between coal and oil prices.

Task 3 Provides New Zealand coal price and availability projections for

the next 40 years.


6/53


2 Key drivers of coal price2.1 Introduction

2.1.1 EC brief

Describe key drivers of the coal price, e.g. demand and supply conditions, price of

substitute fuels, emissions pricing, technology developments such as CCS.

2.1.2 PB approach

PB has provided a review of the main drivers of the coal price including:

Global coal demand

Global coal supply conditions

Availability and prices of substitute fuels

Technology developments

Regulatory settings such as carbon emissions charging

The abundance of coal on the international market and the intensity of

international demand for coal indicate that New Zealands domestic coal market is

heavily influenced by the behaviours of those that New Zealand exports to and

imports from. The availability of coal supply into New Zealand and the prices at

which it can be sourced is driven by a myriad of physical, economic and technical

factors:

the domestically available reserves1, technologies involved in extraction,

and associated costs,

the potential for importing coal, import prices, and supporting supply chaininfrastructure,

the trade in substitute commodities will impact coal demand and prices,

and

wider economic conditions like terms of trade, inflation rates and

movements in the business cycle.

The complexity involved in understanding these drivers is compounded when the

task at hand involves forecasting coal availability and prices in New Zealand for

the next 40 years.

1New Zealand has one of the highest per capita coal reserves in the world


7/53


To understand the drivers of coal availability and prices in New Zealand, and the

behaviours of these drivers into the future, we provide a description of coal

demand and its composition. The end-uses of coal mainly in energy generation

and steel making determine which types of coal is required and in what

quantities.

Then, with an understanding of coal demand and the international coal market, we

then investigate domestic production, exports and imports.

The review has been completed using PB in-house data and publicly available

information.

2.2 Global coal demand and supply

2.2.1 Global demand for coal

Global coal demand is expected to grow at a rate of around 2% per year to 2030.

Around 90% of the corresponding increase in global coal production from 2010-

2030 is expected to occur in non-OECD countries, with China set to almost double

its coal output to help meet an average annual demand growth rate of 3%.

Elsewhere, the US sees average annual demand growth of 0.6%, while Europe is

projected to witness a reduction in demand of on average 0.5% per year. This is

in contrast to regions such as South America with projected demand growth of

3.8% per year and India with 4.1% per year2.

From 2003-2005, global coal use rose 7% with China (15% rise nationally), Russia

(7% rise nationally) and Japan (5% rise nationally) having the biggestcontributions. Figure 2-1 shows the coal demand in 2002 compared to the

projected 2030 demands and the percentage share of coal fuel in electricity

generation3.

2 http://www.worldcoal.org/resources/ecoal/ecoal-current-issue/latest-projections-from-the-international-energy-agency/

3The Coal Resource A Comprehensive Overview of Coal, World Coal Institute, 2005.
http://www.worldcoal.org/resources/ecoal/ecoal-current-issue/latest-projections-from-the-international-energy-agency/http://www.worldcoal.org/resources/ecoal/ecoal-current-issue/latest-projections-from-the-international-energy-agency/


8/53


Figure 2-1 World coal demand figures (2002 to 2030)

Figure 2-1 highlights the trend of increasing demand for coal towards the

developing nations, in line with projected increases in the energy demand per

capita in these countries over the same period.

2.2.2 Global coal supply conditions

The following information has been sourced from the US Energy Information

Administration4:

Total recoverable reserves of coal around the world are estimated at 929 billion

tonnes. Although coal deposits are widely distributed, 80 percent of the worlds

recoverable reserves are located in five regions: the United States (28 percent),

Russia (19 percent), China (14 percent), other non-OECD Europe and Eurasia (10

percent), and Australia/New Zealand (9 percent). In 2006 those five regions, taken

together, produced 4.9 billion tonnes (95.8 quadrillion Btu) of coal, representing 71

percent (75 percent on a Btu basis) of total world coal production. By rank,

anthracite and bituminous coal account for 51 percent of the worlds estimated

recoverable coal reserves on a tonnage basis, sub-bituminous coal accounts for 32

percent, and lignite accounts for 18 percent.

Australia and Indonesia are well situated geographically to continue as the leading

suppliers of internationally traded coal, especially to Asia. South America is

projected to expand its role as an international supplier of coal, primarily as a result

of increasing coal production in Colombia.

4http://www.eia.doe.gov/oiaf/ieo/coal.html
http://www.eia.doe.gov/oiaf/ieo/coal.htmlhttp://www.eia.doe.gov/oiaf/ieo/coal.html


9/53


2.2.3 Coal quality

Quality and geological characteristics of coal deposits are important parameters

for coal reserves. Coal is a heterogeneous source of energy, with quality (for

example, characteristics such as heat, sulphur, and ash content) varying

significantly by region and even within individual coal seams.

At the top end of the quality spectrum are premium-grade bituminous coals, or

coking coals, used to manufacture coke for the steelmaking process. Coking coals

produced in the United States have an estimated heat content of 27.7 GJ per

tonne and relatively low sulphur content of approximately 0.8 percent by weight. At

the other end of the spectrum are reserves of low-GJ lignite. On a GJ basis, lignite

reserves show considerable variation. Estimates published by the International

Energy Agency for 2006 indicate that the average heat content of lignite in major

producing countries varies from a low of 4.7 GJ per tonne in Greece to a high of

13.1 GJ per tonne in Canada.

2.3 Availability and prices of substitute fuels

Recent trends in power generation in OECD countries have seen shifts towards

higher efficiency gas fuelled thermal generation and increased demand for

renewable generation such as geothermal, hydro and wind. With the advent of a

carbon emissions charge, the unit cost of electricity generated from competing

forms of generating plant will be comparable and potentially less than that from

traditional coal fuelled subcritical steam plant. Carbon charging is acting as a

driver for higher efficiency in existing thermal plant and increasing the demand for

viable carbon capture and sequestration solutions.

The US Energy Information Administration predicts that coal and gas will fuel

two-thirds of global electricity generation in 20305. The largest country shares of

the demand for thermal fuels will originate from China and India, accounting for

around 50% of the increase in thermal fuel demand.

Consistent high prices for both natural gas and oil will keep coal fuelled generation

a more attractive economic option for nations that are rich in coal resources, which

include China, India, and the United States.

2.3.1 Natural Gas

As at 2007, proved global reserves of natural gas was equivalent to between 50 to

60 years of global annual consumption6. With the recent developments in global

LNG capacity and infrastructure, both demand for and supply of natural gas has

been increasing. Demand for gas from non-OECD countries is currently rising

twice as fast as the OECD countries.

Since there is currently no import or export of natural gas in New Zealand, the

price of gas is primarily determined by domestic supply and demand. There are a

number of uncertainties in the estimates of gas resources:

Geological and operations

5http://www.eia.doe.gov/neic/speeches/howard052709.pdf

6http://www.eia.doe.gov/emeu/international/reserves.html
http://www.eia.doe.gov/neic/speeches/howard052709.pdfhttp://www.eia.doe.gov/emeu/international/reserves.htmlhttp://www.eia.doe.gov/emeu/international/reserves.htmlhttp://www.eia.doe.gov/neic/speeches/howard052709.pdf


10/53


Reserve estimates over time

The amount of gas remaining in the Maui field

Probability that there will be gas from new fields in the near future

Potential future resources coal gasification, lignites, Methane hydrates

etc.

The current price of gas in NZ is approximately $7/GJ and is subject to change on

new discoveries of gas reserves. Market prices will be capped by parity with

imported LNG and competition from coal and a $15/t of CO2 carbon tax will add

another $0.80/GJ to the gas price if it is fully passed through. Figure 2-2 shows

the NZ quarterly gas production from December 2000-May 2009.

Figure 2-2 NZ quarterly gas production

At current rates of gas production, PB estimates that 50% of the known producing

and planned gas reserves will be depleted within twenty years. In the absence of

significant new fields being found which can provide long term and bankable gas

supplies for electricity generation it is likely that at some point around this time

LNG will be imported to fulfil domestic demand7. This will raise the domestic price

to the imported LNG price. Section 3 discusses the relationship between coal, oil

and gas prices.

2.3.2 Nuclear

Demand for electricity generation from nuclear power is increasing rapidly amidst

concerns about rising thermal fuel prices, energy security, and a desire to curb

CO2 emissions. Higher coal and natural gas prices improve the economics for

nuclear plant despite the high capital and maintenance costs incurred for nuclear

electricity generation technologies. Nuclear energy is seen as a way to increase

the electricity supply diversity, improve security of supply, and reduce CO 2

emissions by displacing fossil fuel plant options. A key issue with nuclear is that

7Gasbridge notes that importing LNG is not currently economic and that the need for importing LNG will be revisited by

2020.


11/53


the demand could easily outstrip supply due to the very low production base for

nuclear equipment and limited technical resources for design and construction.

2.4 Technology developmentsThe predominant coal combustion technology worldwide is sub-critical pulverised

fuel, which is well proven technology with over 40 years operational experience.

The technology has progressively matured and scaled up to large, reliable and low

cost units of up to 1,400 MW. By restricting the steam cycle to subcritical

conditions (below 221 bar), boiler design and operation is simplified, but overall

efficiency is limited to about 35% (net generation, and HHV (Higher Heating

Value)).

New coal-fired electricity generation is increasingly making use of one or more of

the Clean Coal Technology options that are available. Clean coal technology

refers to a range of coal-fired generation technologies that are current state of theart, or are under development, and are strongly focused on reducing pollutant

discharge and increasing plant efficiency in a cost-effective manner.

Another approach to reducing greenhouse gases caused from coal-fired electricity

generation is Carbon Sequestration which involves capturing CO2 and other

types of carbon by biological, chemical and physical processes and storing it.

Because of the very large coal resource still available, the development and

deployment of coal fuelled electricity generation technologies is very strongly

motivated and is the subject of very large investments by a wide range of

stakeholders. There is potential for currently uneconomic technology applications(discussed in Section 2.4) to reduce CO2 emissions from coal fuelled generation to

become economic, and facilitate the continued use of coal as an energy source.

2.4.1 Clean Coal Technology

Super-critical Pulverised Fuel. Supercritical pulverised fuel technology has now

supplanted subcritical plant as the leading coal-fired plant technology for new coal-

fired plant. The cost, availability and reliability of supercritical plant is now on a

par with subcritical plant, but the 10% to 15% efficiency gain leads to significant

reductions in emissions and fuel cost savings for the supercritical plant. For

example, improving plant efficiency from 35% to 41% HHV, results in a 14%reduction in specific fuel consumption and a similar reduction in emissions level.

Atmospheric Fluidised Bed Combustion. Atmospheric fluidised bed

combustion is expected to further develop and exploit a niche market dealing with

difficult fuels and the disposal of waste materials. Unit size is currently limited to

around 300 ~ 400 MW but the technology is not proven at this size. Efficiency is

good and likely to improve as supercritical steam conditions are used.

Pressurised Fluidised Bed Combustion, and Integrated Gasification

Combined Cycle. Pressurised Fluidised Bed, and Integrated Gasification

Combined Cycle, both utilise gas turbine technology to improve generation

efficiency. IGCC also offers potential advantages of H2 production for fuel cell or

other applications. These technologies are still at the development stage and


12/53


have yet to demonstrate the high reliability at reasonable cost that is required to

proceed to wide scale commercial application.

2.4.2 Carbon Sequestration

Carbon Sequestration is a method for the long-term storage of CO 2 to reduce the

amount of greenhouse gas produced from coal-fired electricity generation. The

method involves capturing the carbon emissions either pre-combustion or post-

combustion and storing the captured gas using a variety of storage methods. If

the costs prove attractive and the required support is present then sequestration

may be an option for the Huntly Power Station.

Pre-Combustion

Pre-combustion capture involves removal of CO2 prior to combustion to produce

hydrogen. The combustion of hydrogen produces zero CO2 emissions with the

main by-product being water vapour. Once the hydrocarbon fuel (in this case,gasified coal) has been converted into hydrogen and carbon monoxide (CO) to

form a synthetic gas, it is reacted with water then the conversion is shifted. The

CO2 is then separated from the hydrogen for clean combustion and compressed

into a liquid for transportation and storage.

Post-Combustion

Post-Combustion capture involves removing the dilute CO2 flue gases after

hydrocarbon combustion. The most common method is passing the CO2 through a

solvent and adsorbing it and then being released by changing the temperature

and/or pressure. Another process currently under development is calcium cycle

capture that uses quicklime to capture the CO2 which is then produces limestone.This limestone can be heated and the CO2 removed with the quicklime left over

being recyclable.

Post-Combustion methods require additional energy input to successfully remove

CO2 from the solvent and may increase energy costs by up to 30% (compared to

plants without capture). This may be reduced to 10% with more efficient solvents

currently being developed.

Research and development is currently being done to create more post-

combustion methods including cryogenically solidifying CO2 from flue gas, passing

CO2 through a membrane and using adsorbent solids.

2.4.3 CO2 Storage

Underground storage. Underground storage of CO2 involves injecting CO2

directly into underground geological formations (oil fields, gas fields, unwinnable

coal seams, saline formations etc).

Oil fields have been used for injecting CO2 into declining oil fields to increase oil

recovery and is an attractive option in a number of locations. This is due to the

geology of hydrocarbon reservoirs usually being well known and the additional sale

of oil can offset part of the storage costs. There are arguments that question the

net CO2 reduction of this strategy however; The big question is how to account for

the emissions arising from the upstream operations of extra oil production,

downstream refining and finally combustion of the fuel. It is my belief that any


13/53


emissions trading benefits which arise from CO2 sequestration as part of a CO2

enhanced oil recovery project should be discounted according to a detailed

analysis of the full cycle carbon balance using the principal of additionality.8

Unminable coal seams have been used for CO2

storage due to CO2

absorption by

the surface of coal but this relies heavily on the chemical structure of the coal bed.

During this absorption the coal releases previously absorbed methane which can

be recovered and sold to offset part of the CO2 storage costs. The disadvantage

is that the burning of the methane gas produces CO2 which negates part of the

CO2 stored. A similar argument to the enhanced oil recovery above.

Ocean storage. Another proposed form of carbon storage is in the oceans.

Several concepts have been proposed:

'dissolution' injects CO2 by ship or pipeline into the water column at depths

of 1,000 m or more, and the CO2 subsequently dissolves.

'lake' deposits CO2 directly onto the sea floor at depths greater than

3,000m, where CO2 is denser than water and is expected to form a 'lake'

that would delay dissolution of CO2 into the environment.

convert the CO2 to bicarbonates (using limestone)

Store the CO2 in solid clathrate hydrates already existing on the ocean

floor, or growing more solid clathrate.

The environmental effects of oceanic storage are generally negative, but poorly

understood. Large concentrations of CO2 kills ocean organisms, but another

problem is that dissolved CO2 would eventually equilibrate with the atmosphere,so the storage would not be permanent.

Mineral sequestration. In this process, CO2 is exothermically reacted with

abundantly available metal oxides which produces stable carbonates. This

process occurs naturally over geological timescales and is responsible for much of

the surface limestone. The reaction rate can be made faster, for example by

reacting at higher temperatures and/or pressures, or by pre-treatment of the

minerals, although this method can require additional energy.

The additional energy required to achieve mineral sequestration to a conventional

power plant is between 60-180% with the by-product created being able to be sold

to offset part of the additional costs.

The advantages of mineral sequestration are:

The carbonates formed are thermodynamically stable and the disposal is

therefore permanent. There is no chance of the carbon dioxide escaping

into the atmosphere.

The mineral resources on earth far exceed need.

Carbonate is the lowest energy state of carbon, not carbon dioxide.

8Will the wheels of CCS be oiled? Sam Gomersall, carbon capture journal Issue 9, May June 2009


14/53


"Mineral carbonation occurs naturally on a geological time scales and

would eventually absorb all the additional carbon dioxide." The process is

just speeding up one that occurs in nature.

The minerals are readily accessible in locations near high-density power

generation centres.

There is potential to produce value-added by-products.

The process is compatible with both technologies under development and

current power systems.

Predicted cost is not unreasonable.

Implementation without an external supply of heat is possible because the

reaction is exothermic.

The disadvantages of mineral sequestration are:

Carbonation plant must be at the site of the mine due to the large volumes

of the raw minerals required.

Volumes increase upon carbonation; in order to store the newly formed

carbonates back in the source mine some terrain alteration will be

necessary.

Extensive mining operations necessary, which will have environmental

and CO2 production impact.

There is the potential for asbestos to be present in the mineral deposit.

The mineral preparation or sequestration process must be able to deal

with ore impurities.

2.5 International policy settings

The future demand for coal-fired generation could be significantly reduced

following consensus international agreement to reduce CO2 emissions. However,

globally, as coal is the largest source of energy for electricity generation,

especially in developing nations, these agreements are unlikely to have any major

effects in. Current global usage levels strongly motivates policy settings to still

allow for coal fuelled electricity generation but technically, commercially and

economically motivates the application of carbon capture and sequestration.

There appears to be a growing consensus that while putting a cost on the emission

of CO2 by emissions trading will help reduce CO2 emissions, this is not sufficient in

itself to achieve the proposed global CO2 emission reduction targets. To achieve

the desired CO2 emissions targets, many jurisdictions are regulating a minimum of

the total electricity generation to be generated using renewable energy sources.


15/53


2.5.1 NZ regulatory setting

The New Zealand Government has been trying to define and implement a

comprehensive greenhouse gas emissions policy since 2002. The 2007 NZ

Energy strategy defined a target of 90% of generation should be from renewable

sources by 2025, and introduced a ten year moratorium on new baseload thermal

generation enacted with an Emissions Trading Scheme.

The current New Zealand Government is reviewing the Emissions Trading

Scheme legislation, and has repealed the moratorium on new thermal generation.

Considerable uncertainty exists on the future format for regulations around

greenhouse gas emissions in New Zealand.

2.5.2 Impact of carbon charging on energy cost

If we assume9

Huntly West No. 1 fuel contains 56.3% carbon (% mass), giving rise

to a fuel specific CO2 emission rate of 2.06 kg CO2 per kg of coal. For an

assumed Huntly Power Station plant efficiency of 35% (net, HHV), the electrical

energy specific emission is 943 kg CO2/MWh.

Because CO2 emissions are derived directly from the carbon in the coal fuel, an

emissions charge on CO2 is effectively a surcharge on the cost of fuel. An

emissions charge of $25/tonne of CO2 will effectively add $52.53/t or $2.29/GJ to

the cost of the assumed Huntly West No. 1 coal.

An emissions charge of $25/tonne of CO2 will add 2.36 cents/kWh to the energy

cost, based on the use of Huntly West No. 1 coal and a 35% net, HHV plant

efficiency.

Thus, if the proposed maximum emissions charge of $25/tCO2 were to be passed

through at cost to an industrial customer on an energy component of the

electricity tariff of 6 cents/kWh for all the electricity purchased, the energy tariff

would be increased by 39%. This is substantially more than the 16% estimated in

the Governments Climate Change paper referred to above, which we speculate

was calculated on the basis of a mix of hydro and thermal generation.

2.6 Carbon Emissions Trading Scheme (ETS)

effectsACIL Tasman has carried out a study for the Energy Supply Association of

Australia to examine the effects on an Australian Emissions Trading Scheme

(ETS) introduced from 2010 on Australias stationary energy markets. ACIL

created a simulated model based on the year 2020. The simulations indicate the

forced retirement of about 6,700 MW of base load plant in the 10%10

case to be

replaced by 15,000 MW of new plant between about 2011 and 2020. The

modelling produced an emission permit price of $45/tonne CO2-e in the 10% case

and $55/tonne CO2-e in the 20% case.

9NZ Energy Information Handbook, J.T. Haines, 1993.

10A case involving a 10% reduction in the 2000 emission levels by 2020.


16/53


The major effects11

of the ETS are:

Prices

With a 10% target emission prices reach $45/tonne CO2-e in real terms

and $57.50/tonne CO2-e in nominal terms by 2020. With a 20% targetemission prices reach $55/tonne CO2-e in real terms and $67/tonne CO2-e

in nominal terms.

Regional reference prices (in nominal prices) in the National Electricity

Market (NEM) are $97 to $109/MWh in the 10% case while in the 20%

case they are $98 to $122/MWh.

In real terms the recommended retail prices (RRPs) range from $70 to

$79/MWh in the 10% case and $71.50 to $88/MWh in the 20% case.

Queensland, NSW, South Australian and Victorian prices are within a few

dollars while Tasmanian prices are the lowest.Changes in capacity

New generation capacity to replace retiring brown coal and some black

coal plant will need a significant building effort. The modelling indicates

that the 10% case will cause the retirement of 6,145MW of mostly brown

and some black coal plant in the NEM.

In the 10% case, retirements would be replaced by 13,672MW of gas fired

and renewables plant in the NEM.

The capacity of new plant in the NEM is about 205% of that being retired

in the 10% case and approximately 160% in the 20% case. This is partly

to cope with some level of growth in demand, although growth in energy

demand in both cases is low given the effects of conservation measures,

demand response to higher prices and the use of distributed renewables,

but mainly because much of the new plant is renewable generation with a

relatively low capacity factor (less than 35%) and more capacity is

required to produce the same amount of energy.

Sale of existing assets

Using the net present value of returns per kW over the 10 years 2010 to

2020, the average of this indicator for Victorian and South Australian coalfired generation indicated a fall of over 80% in asset value in the 10%

case and over 90% in the 20% case.

For NSW coal generation the corresponding falls were under 80% and

about 90% and Queensland coal fired generation assets also reduced by

80% and almost 95%.

Gas fired CCGTs on average reduced in value by about 40% in the 10%

case and about 45% in the 20% case, largely because of the increase in

the costs of gas for generation. The average asset value of gas fired

OCGTs reduced in value by 70% and about 80% respectively.

11The Impact of an ETS on the energy Supply Industry, ACIL Tasman, July 2008.


17/53


Capital expenditure

In the 10% case it was estimated the cost of investment in generation in

2008 prices at $30.3 billion in the NEM.

In the 20% case it was estimated the cost of investment in generation in

2008 prices at $33.5 billion in the NEM.

These estimates of capital expenditure do not include the costs of

expanding the electricity transmission network in order to connect

geothermal and wind generation in remote locations or the cost of

expanding the gas supply network. It is estimated that approximately $4

billion would be required to enhance the transmission network to include

this new plant and at least $0.5 billion in the new pipeline investment to

carry additional gas to power stations

2.7 Australias Carbon Pollution ReductionScheme (CPRS)

With Australia being one of the biggest coal exporters in the world the CPRS is set

to make a significant impact on the global market as well as any combined

Emissions Trading Scheme that may be set between Australia and New Zealand.

The following are components of the scheme that are relevant to coal.12

Currently under review, the CPRS includes transport fuel, but mitigates the cost

for 3 years, while excluding agriculture for at least 5 years. Coal-fired generators

will be provided compensation and trade exposed emission intense industries will

be given free permits up to 30% of the total. Businesses that emit more than

25,000 tonnes CO2-e will be obligated under the scheme.

2.7.1 Captured coal mines

Several submissions from the coal-mining industry argued that captured coal

mines should receive assistance as a strongly affected industry. Those

stakeholders included the Australian Coal Association, the Minerals Council of

Australia, the New South Wales Minerals Council, Centennial Coal, Xstrata Coal

and Wesfarmers Limited.

The Government acknowledges that the relative emissions intensity of coal-fired

electricity generators has the potential to cause impacts in the generation sector

that translate through to the mines that supply coal to those generators. However,

the particular circumstances of those coal mines might not justify assistance

measures.

Even though coal-fired electricity generators profitability might reduce under the

scheme, that loss will not affect coal mines supplying them unless the generators

materially reduce the volume of coal they use. The Governments modelling of the

electricity generation sector indicates that the majority of coal-fired electricity

12 Carbon Pollution Reduction Scheme, Australian Government, 2008


18/53


generators are able to maintain their market share during the first decade of the

scheme.

Those generators that might lose volume or close during the first decade of the

scheme are generally those of relatively lower efficiency and therefore higher

emissions intensity, and may be vulnerable to losing market share in the absence

of the scheme. Offering assistance to a coal mine that supplies such a generator

would require the Government to assess the likelihood that the generator would

not have lost market share in the absence of the scheme.

Furthermore, providing assistance on this basis requires the assumption that, in

the event of the closure of a given generator, the coal mine would be physically

unable to supply another generator in the domestic or export markets. This

requires an assessment of the physical circumstances of a mine, such as access

to railway or port facilities, as well as the likelihood that a new facility would be

constructed to use the coal at that source, such as a generator using carbon

capture and storage or coal gasification technologies.

Because of these material uncertainties, the Government will not provide strongly

affected industry assistance to captured coal mines.

However, the Government recognises the significant exposure of particularly

emissions-intensive underground coal mines under the scheme, and has proposed

a transitional assistance package to this class of coal mines through the Climate

Change Action Fund.

2.7.2 Coal-fired Generation

For coal-fired generators, it has been determined that even though coal-fired

electricity generators profitability might reduce under the scheme, coal mines will

not be effected unless the generation capacity of the generator is reduced. As

there will be no assistance given to generators and assistance only given to a

certain class of coal mines, the Government is focusing on improved energy

efficiency which may have to be achieved by:

Upgrading current coal & gas fired generators to super-critical or

ultra-supercritical boilers

Further development in the production of clean coal electricity

generation technology.

2.7.3 Carbon Capture and Storage

Carbon capture and storage (CCS) is likely to be a key future component of the

global solution to climate change. Coal is likely to continue to be a major energy

source for the world over coming decades. For Australia, coal will be the main

source of its electricity supply into the future and a major contributor to Australias

export revenue. All major Australia and international models of ways to achieve

lower greenhouse gas emissions expect a significant part of the reduction to be

achieved through the use of CCS. The Government has announced the Global

Carbon Capture and Storage Initiative to accelerate the scaling up and

deployment of CCS technology across the world.


19/53


2.7.4 Coal Gasification

Coal Gasification can be used to produce syngas, a mixture of carbon monoxide

(CO) and hydrogen (H2) gas. This syngas can then be used for electricity

generation or converted into transport fuels like gasoline and diesel through the

Fischer-Tropsch process. This process has been successfully conducted in both

underground coal mines and coal refineries.

In Australia, CSIRO Energy has developed several collaborative initiatives into

clean coal technologies, in particular coal gasification. At this current time there

are several trial gasification plants being operated or under construction including

the Bloodwood Creek Underground Coal Gasification site located in the Surat

basin in south-east Queensland run by Carbon Energy Limited.

The implementation of coal gasification for power generation would preserve a

high level of coal demand for electricity generation.

2.7.5 Coal-to-Liquids (CTL)

CTL technologies have the potential to increase additional future demand for coal.

The production of liquids from coal requires the breakdown of the chemical

structures present in coal through the simultaneous elimination of oxygen, nitrogen

and sulphur in the introduction of hydrogen. The action produces a stable liquid

product. Coal can be converted into a variety of products including petrol, diesel,

jet fuel, plastics, gas, ammonia, synthetic rubber, tars, alcohol and methanol.

2.8 The international coal market

2.8.1 Overseas reserves and production

In 2006 there were about 137 years of recoverable coal reserves available

worldwide. This important fact suggests that worldwide coal reserves are unlikely

to be a constraint on the availability of coal to New Zealand over the 40 year

forecast period for this project. The following chart shows 2006 reserves and

levels of production by country13

.

13Source: US Energy Information Authority


20/53


Figure 2-3 World recoverable Coal Reserves as of January 1, 2009, billionshort tonnes

Australia and Indonesia are the two major exporters of coal in the Asia-Pacific

region, and the likely sources of coal imports into New Zealand.

Australia exports 100 million tonnes of thermal or steaming coal per year (99.86

Mt in 2002) and is the largest exporter of steaming coals in the world. The main

ports for export of coal are Newcastle, Gladstone and Dalrymple Bay. Almost all

of the Australian exported steaming coal is bituminous.

Indonesian sub bituminous coals are low in ash (1%) and sulphur (0.1%). They

are classified as sub-bituminous B the same as the better coals in the Waikato and

appear to be similar in character. The low sulphur characteristic is important for

Huntly power station because it relies on this low sulphur content to comply with

the SOx emission limits imposed by its resource consent.

2.8.2 Overseas costs and prices (historically, now, and in the future)

International prices outside of the US vary depending on the coal quality and

source. Between 1991 and 1998 the market price for steaming coals, with heat

content around 27 GJ/t, delivered to northwest European ports has ranged from

US$31.8 to US$45.8 per tonne (cost, insurance, freight or CIF). The Japanese

have traditionally used a benchmark system which is still functioning effectively,

however Japanese utilities are undertaking some purchases on the spot market, to

obtain coal at discounts to the bench mark price. The benchmark price for

steaming coal in 1997 was US$45.5 per tonne (CIF), having ranged between

US$41.3 and US$50.8 per tonne over the previous decade.

The competitive pricing and the relatively short distance to transport the coal from

Australia to New Zealand makes steaming coal sourced from Australia cost


21/53


effective. Steady decline in costs of extraction in Australia due to increase in coal

sector productivity.14

The other potential source is Indonesia which exports both bituminous and

sub-bituminous coals. The cheapest coals are the sub-bituminous types, with

PT Adaro and PT Kideco being the major exporters of this type. These

sub-bituminous coals are very similar to the Waikato Coals and have low sulphur

content. Indonesian coal would be expected to be priced around US$25 CIF at the

Port of Tauranga, making an allowance for the extra shipping distance to New

Zealand. Sea freight charges are heavi ly dependent upon quantities and the size

of the vessel and are thus difficult to estimate with any degree of certainty.

The international traded coal fob prices, plus sea freight and inland delivery costs,

including amortised costs of the importing facilities, provide an indicative price cap

for locally sourced coal.

Imported coal will be invariably priced in US dollars with the consequent exposureto the $US:$NZ exchange rate. Long term protection against exchange rate

fluctuations in the $US:$NZ is difficult to achieve and the economics of coal

importing will need to cater for expected changes in the exchange rate. It may be

possible to purchase Australian coal in $AUS which may provide a better foreign

exchange hedge for New Zealand than $US.

In the past, in the Asia-Pacific region, trade in steaming coal was largely via

long-term supply contracts and much pricing was referenced to the Japanese

Benchmark. In recent years, however, this system has been breaking down, and

a much greater proportion has been purchased under short-term contracts or on

spot prices. As a result, there is much greater price volatility, reflecting globalsupply/demand imbalances, which superimpose on longer term cyclicity in coal

prices.

The factors that limit the impact of international coal prices on local prices are:

Sufficient indigenous resources and production capacity to meet local

demand,

most local suppliers do not export,

the high per GJ transport costs to import relatively small amounts of coal, and

the limited availability of coal importing port infrastructure.

A very large coal consumer may find it economic to import coal in large shipments

through dedicated facilities at the point of consumption. In a press statement in

March 2002, Todd Energy, in announcing its impending sale of its interest in the

West Coast Rapahoe mine, offered the opinion that:

There was plenty of coal mined around the world that could be mined easily

and it could be shipped to New Zealand for power generation. So there was no

guarantee New Zealand coal would be cost effective, especially if it had to be

moved to the North Island for sale. If New Zealand moved to coal-fired power

stations they would be north of Auckland, close to its big market, near a deep

water port like Whangarei where big volumes of coal could be brought in.

14ABARE, Energy Outlook 2011


22/53


This view would be contested by Solid Energy who would be very keen to supply

local power generation market and to prevent coal imports affecting their local

market presence.

Since a significant number of competing suppliers supply the domestic market,

and they supply from local reserves, the international prices obtainable for export

coals is not a fundamental benchmark for local coal prices.

Today, NZ import coal prices comprise a port and a transport component. The

port price for coal is presently about $4/GJ, with transport costs to site an

additional $0.25 to $0.5/GJ.

2.9 Domestic coal demand

New Zealand consumed about 3.9 million tonnes of coal in 2008 (84.8 PJ). This

represented a 25% increase over 2007, but a 10% drop from 2006 consumptionlevels. The left hand side figures in the following chart shows New Zealands coal

consumption since 2000: consumption has increased over the period, but has

plateaued over the past 5 years. The right hand side shows sector shares of coal

consumption in 2008, indicating that the electricity generation industry is the

largest user of coal in New Zealand, by far.

Electricity generation is also the sector that has the greatest impact on coal

demand, with coal being used to provide the greatest proportion of the flexibility

required to generate sufficient energy during dry years.

Figure 2-4 Coal consumption by sector, Gross PJ, 2000-200815

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008

Other

Commercial

Industrial

Othertransformation

Electricitygeneration

15Energy Data File 2008 Calendar Year Edition. Ministry of Economic Development, 2009.


23/53


Figure 2-5 Coal consumption shares by sector, 200816

Othertransformation

19%

Other use3%

Commercial5%

Electricitygeneration

51%

Industrial22%

Just over half the coal consumed in 2008 was used for electricity generation by

large generators. Other transformation almost exclusively steel making

accounted for 19%. Small scale energy generation in the industrial, commercial

and residential sectors accounts for the remaining consumption.

Major consumers of New Zealands coal include:

Genesis, Huntly power station (approximately 2 - 2.5m tonnes per year)

Glenbrook steel mill (700,000 tonnes per year)

Cogeneration plant at dairy factories e.g. Clandeboye.

General industrial use and residential market.

2.9.1 Electricity generation

Domestic coal consumption in New Zealand is dominated by the electricity

generation industry. However, as a proportion of fuels used in generating

electricity, coal ranks third behind renewable sources and natural gas.

Furthermore, as the following chart indicates, the use of coal in generating

electricity has been variable since 2000. The minority status of coal used in

electricity generation, and its variability over time, are important considerations in

forecasting demand for coal into the future.

16Energy Data File 2008 Calendar Year Edition. Ministry of Economic Development, 2009..


24/53


Figure 2-6 Net electricity generation by plant type, GWh, 2000-200817

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Other Non-renewable

Coal

Gas

Other renewable

Wind

Geothermal

Hydro

Figure 2-7 Net electricity generation by plant type, GWh, 200818

Hydro

52.3%

Coal

10.5%

Gas

23.7%

Other Non-renewable

0.4%

Geothermal9.4%

Wind

2.5%

Other renewable

1.2%

2.9.2 Other transformation

Steel making represents historically the other significant use of coal in New

Zealand, accounting for approximately 18% of coal consumption. New Zealand

has two significant steel plants: Glenbrook and Pacific Steel. However, while

Glenbrook sources coal from Waikato, much of the raw material input at the


18Energy Data File 2008 Calendar Year Edition. Ministry of Economic Development, 2009..


25/53


Pacific Steel plant is scrap metal. To the extent that New Zealands coal

consumption is driven by the steel making industry, it will be driven by Glenbrook.

The following figure shows that coal consumption categorised as other

transformation the significant majority of which is steel making has remained

relatively constant since 2000, and declined between 2006 and 2008.

Figure 2-8 Coal consumption by the other transformation sector, grossPJ, 2000-2008

19

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008

The domination of fuel sources other than coal in the generation of electricity and

the relatively constant consumption of coal by New Zealands steel industry

support the idea that, without substantial changes in both industries, domestic

demand for coal in New Zealand into the future will not grow appreciably. Future

demand for coal is addressed in the next two subsections.

2.9.3 Future demand trends electricity generation

According to New Zealands Ministry of Economic Development (MED) in 2005,

domestic electricity supply was to grow by 40% or 1.5% year on year between

2005 and 2030. MED expected hydro-generated power to maintain its dominant

share, but that costs of new development, environmental constraints on new plant

development, and competition for water use would mean the amount of power

generated from hydro sources would remain constant, indicating that its overall

share would fall.

In contrast, the share of wind, gas and geothermal in electricity generation would

increase substantially, compensating for the proportionate reduction in hydro

power, and displacing coal. MED forecast coal use in domestic electricity

generation to increase by 15% only between 2005 and 2030, or 0.6% year-on-

year.

2.9.4 Future demand trends steel

Despite the recent downturn, MED expects worldwide steel demand to remain

strong over the forecast period, supporting high steel prices. Of New Zealands



26/53


two significant steel plants Glenbrook and Pacific Steel this will benefit

proportionately Glenbrook, which exports about half its output.

However, the steel-making process at the Glenbrook plant is designed to

accommodate the specific properties of coal sourced from Waikato, and (as

discussed below) coal extraction at Waikato is expected to become increasingly

more expensive. Absent unexpected shifts in the steel market, MED surmises that

Glenbrook will not expand production and its consumption of coal appreciably.

2.10 Domestic reserves and production

To this point it has been established that growth in New Zealands domestic coal

consumption is expected to be moderate, there is an abundance of coal available

on the international market for import into New Zealand, and that import prices will

be a binding constraint on the margins earned by domestic coal producers. In

addition to these factors, domestic supply of coal for domestic consumption will beimpacted by domestic coal reserves, the costs of extraction, and export

opportunities.

Table 2-1 shows domestic reserves by rank and by region. Huntly Power Station

has traditionally burnt lower calorific value (CV) sub bituminous coals, which are

typical of the coals in Waikato region, and Waikato in the north is by far the

significant source of thermal coal; the West Coast deposits in the south supplies

all bituminous, harder, coal.

Table 2-1 Domestic reserves by rank and region, PJ, 2001

ReservesRank

Bituminous Sub-bituminous

Lignite

North Island Waikato 15,601South Island West Coast 2476.8 134.7

Canterbury 18.8Otago 61.3 1.4Southland 193.4 252.1

NewZealand

2476.8 16,009.2 253.5

Table 2-2shows 2008 levels of production, and demonstrates that domestic

reserve totals could sufficiently supply New Zealand for hundreds of years. Assuch, domestic reserves are not a binding constraint on availability.

Table 2-2 Production by rank and region, PJ, 2008

ProductionRank

Bituminous Sub-bituminous

Lignite

North Island Waikato 40.5South Island West Coast 78.4 2.8

Canterbury 0.4Otago 1.2Southland 4.7 3.8

NewZealand

78.4 49.6 3.8


27/53


South Island West coals are typical high CV bituminous coals. These are less

volatile, making them safer to transport, and have higher energy content per

tonne, making transport cheaper per unit of energy provided. Almost all of this

coal is exported, and mostly for steelmaking and specialist uses.

2.11 Domestic costs and prices

New Zealand coal commodity prices for domestic coal are determined by factors

that include:

extraction costs, including mine development and rehabilitation costs,

competing coal suppliers for the specified coal quality, and annual and total

quantities required,

coal quality and impacts on capital, operating and maintenance costs for the

most appropriate utilisation technology,

location of the fuel relative to the place of consumption

competing fuels, and competing utilisation technology

Figure 2-9, sourced from MED, shows the costs of extraction of New Zealands

significant coal operations.

Figure 2-9 Solid energy coal resources and costs, by region, 200520

It has been established previously in this report that the most relevant source of

thermal coal for domestic consumption is the Waikato. Costs of extraction at

Waikato begin at about $2.50/GJ, rising to $5.50 for the first 2,200 PJ extracted.

Costs then increase steadily. As indicated previously, prices for domestic coal

which is consumed domestically will be constrained by import prices. From

current levels, import prices would have to rise substantially for coal reserves at

Waikato to be exploited fully.

20Source: New Zealands Energy Outlook to 2030, September 2006, Ministry of Economic Development


28/53


Table 2-3 summarises the remaining significant determinants of domestic coal

prices.

Table 2-3 Determinants of domestic coal prices

Suppliers State-owned Solid Energy controls about 80% ofnational coal production, with the remainder minedby a number of smaller private mining companies.Given the high proportion of state ownership,market concentration leading to oligopoly pricingis unlikely.

Domestic coal transportation The Waikato coal fields are in close proximity tothe Huntly power station and, relative to unloadingand transport costs associated with importingcoal, advantage domestic suppliers.

Competing fuels: domestic gasprices

While coal prices are expected to remain verycompetitive with gas it is expected that there will

be an upward pressure on the price of coal as theprice of gas increases with the depletion of Mauiand the development of new more expensive gasresources.

Competing fuels: renewables The costs of power generation from renewablesources in New Zealand are especiallycompetitive, and represent a constraint on thetranslation of coal extraction costs into coal prices.Cost supply curves for renewable power beginlower than those for coal: about 4,600 GWh canbe produced with renewable power for a marginalcost of less than 6 cents/kWh, while North Islandcoal generation starts at 7 cents/kWh.

21Capacity

is the significant constraint on renewableproduction. While hydro is expected to beconstrained in the future because of environmentalconcerns, significant capacity expansion isexpected in wind and geothermal generation.

2.12 Net result: Domestic production, imports,exports and prices

Preceding discussion has established that:

New Zealands thermal coal consumption is variable, but has decreased in

recent times as renewable and gas fuelled electricity production has

displaced coal.

Historically, thermal coal consumption was met, mostly, by domestic

production. Recently, competitive imports have displaced up to one third

of domestic production.

Domestic production of thermal coals is becoming increasingly more

expensive with costs of extraction expected to increase at a faster rate

than some international suppliers such as Indonesia and Australia.21

Source: East Harbour Management Services, Availabilities and Costs of Renewable Sources of Energy for GeneratingElectricity and Heat, 2005 Edition, June 2005, and East Harbour Management Services, Fossil Fuel Electricity GeneratingCosts, June 2004.


29/53


Over half of New Zealands domestic production is exported for steel

production overseas. The attractiveness of export prices for this harder

variety of coal makes it unlikely that it will be consumed domestically.

This effectively bifurcates the New Zealand coal market: most thermal

coal produced domestically is consumed domestically, with importsmaking up the domestic shortfall; while harder coal is exported and not

available for domestic consumption.

Figure 2-10 reflects these market dynamics.

Figure 2-10 Domestic coal production, exports, imports and consumption,Gross PJ, 2000-2008

22

-100

-50

0

50

100

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

Exports Domestic production - exports Domestic production - domestic consumption Imports

2.12.1 Looking forward

In the report New Zealand Energy Outlook to 2020, dated February 2000, the

Ministry of Economic Development states that:

Currently around 80PJ of coal is extracted in New Zealand, including coal forexport. The projected growth in domestic consumption to 2020 will therefore

put very significant pressures on the New Zealand coal industry and its

supporting infrastructure. It is unlikely that all this increased demand will be

met by New Zealand production, given that significant new mine development

would be required, potentially at a higher cost than imports. Thus a sizeable

portion of future demand is likely to be sourced internationally.

The same report also states:

Projections of internationally traded coal prices act as a cap on the domestic

price of coal allowing for transport costs. The baseline scenario assumes that

New Zealand wholesale coal prices rise from around $2.60/GJ in 1998, to

22Source: New Zealand Energy Data File, 2008 Calendar Year Edition, Ministry of Economic Development


30/53


$3.00/GJ in 2010 in real terms, remaining flat thereafter. Significant new

investment in mine capacity will be required to source all of New Zealands

projected coal demand domestically, given the growth in demand, and the

decline in some of New Zealands existing coal mines over the outlook period.

It is expected that Solid Energy would make every effort to both exploit indigenous

coal resources at competitive extraction costs and work with transport companies

to minimise transport costs in order to maintain the cost of domestic coal below

that of imported coal.

While coal prices on an energy basis are presently, and will continue to be

competitive with gas, future coal prices will not only depend on the mining costs

but will be subject to external factors including:

the future price for gas and its availability post Maui (restricted gas supplies

will increase the opportunity cost of coal);

the level of demand for coal within the Waikato region (including whether

Glenbrook steel making plant closes, allowing the annual production of coal

supplied under this contract to be made available to others); and

whether an appropriate (long term) contract can be agreed between Solid

Energy and the purchaser which allows for economic mine planning.

During the drought of early 2003, Genesis announced plans for the importation of

coal via Tauranga. A joint media release from Solid Energy and Genesis Power

dated 4 June 2003 announced the supply of 11 Mt (and possibly up to 14 Mt) of

coal to Huntly Power Station over eight years. After a period of ramping of

deliveries, Solid Energy would increase coal supply to 1.7Mt per year out to 2011.In addition, Genesis indicated it could augment supplies, with 0.5Mt per year from

other operators and 0.5Mt per year from Indonesia.

Both South Island West Coast coals and internationally traded bituminous coals

are higher CV coals. They are less volatile, making them safer to transport, and

have a higher energy content per tonne, (making transport cheaper per unit of

energy provided) but are generally not well matched to Huntlys design coal.

Huntly is designed to operate on lower CV, sub-bituminous coals. If it was

necessary to burn significant proportions of West Coast coal at Huntly Power

Station, it is expected plant modifications may be required. Modifications to the

precipitators may be required to ensure that particulate emissions remain at anacceptable level. Some West Coast coal has a high sulphur (2.1%) content

compared to the Waikato coals. To ensure that sulphur emissions are within the

consented limits, blending with low sulphur Waikato coal would be required. West

Coast coal which is low in sulphur has a high value and is exported.

Looking forward, this discussion supports the following conclusions:

Absent extraordinary investment or concessions by Solid Energy, thermal coal

reserves will be increasingly more expensive to extract for use at Huntly

Development of new renewable sources of power generation will continue to

restrict use of domestic coal for power generation


31/53


The prices of coal on the international market will cap prices for domestic coal,

and lead to greater domestic penetration of imports, most likely sourced from

Australia and Indonesia.


32/53


3 Coal and oil pricerelationship3.1 Introduction

3.1.1 Electricity Commission brief

Describe the relationship between coal and oil prices.

3.1.2 PB approach

To demonstrate the price relationship between coal and oil, PB has reviewed

historic movements and current trends in the relevant prices for coal and oil.

3.2 Historic price trends

Historical experience in fuel prices suggests that oil and gas demonstrate a

stronger relationship than the diminishing link between coal and oil prices. This isexemplified by the fact that during oil price shocks, gas prices increase

substantially due to the fact that that gas and oil are often in direct competition in

industrial and power end-uses. During this time prices for coal rose less than that

for gas. Demand for coal increased as generators substituted coal for heavy fuel

oil where possible. The high prices for coal during the late 1970s and early 80s

reflected the ability of higher cost coal producers to increase supply accordingly.

Following this increase in demand coal supply markets reacted and investments

were made in mining and transport capacity which resulted in a decrease in the

real cost of coal back to long term trend levels.

The linkages between oil and coal prices may be increased by thecommercialisation of economic technology to convert coal into oil and gas

substitutes. The Capex of converting coal currently does not allow market pricing

of coal to gas or oil.

Demand shift in fuels for electricity generation have further weakened the price

link between coal and oil. Since the oil shocks, fuel oil is rarely used for baseload

generation, but may be kept as reserve generation or to provide peaking capacity

e.g. Whirinaki. Fuel oil has become less of a substitute for coal and as such

changes in the oil price have a reduced effect on the demand for power generation

fuels and prices.


33/53


3.3 Current price trends

If oil and coal fuels were perfect substitutes, the price trends would be identical.

To demonstrate the point that the fuels are not perfect substitutes we can examine

historic price movements. At its maximum in 2008, the price of oil was about 4times it's January 2000 value whereas the price for coal was approximately 1.8

times the January 2000 value. Figure 3-1 demonstrates the relevant movements

in prices for coal, gas and oil from January 2000 to January 2008.

Figure 3-1 Coal, natural gas and oil price index changes, 2000-2008

0

1

2

3

4

5

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Priceindex,

Jan2000=

1

Coal

Gas

Oil

A primary reason for coal prices to have increased half the rate of oil is the coal

market has a limited range of applications and low substitution value, as well as

the delivery cost of coal. The transportation cost of coal is a substantial

component of delivered cost while the transportation costs of oil are a relatively

small proportion of the delivered costs.

In the US, domestic coal use has declined recently due to the economic

conditions. Coal price has increased marginally, however, due to higher

transportation fuel costs and increased foreign demand for US coal. The increase

in the price of oil, and hence transportation costs has indirectly contributed to an

increase in delivered coal prices23

.

Crude oil prices are more a function of world economic growth and supply

restrictions. The growth rates of oil consumption in developing economies have

been greater than the growth rate of the world crude oil supply. The current (2009)

world economic recession has temporarily removed the consumption-supply

upward price pressures on oil.

23U.S. Coal Supply and Demand: 2008 Review," EIA, April 15, 2009


34/53


3.4 Substitution value

As discussed in Section 2, the potential for coal as a substitution fuel is high but

currently involves prohibitive Capex issues. As gas and oil prices rise, these coal

based technologies will become economic and have the potential to increase theprice linkage between the fuels. For example Solid Energy is investigating the

conversion of Southland Lignite to transport fuels.

Figure 3-2 demonstrates the potential for coal conversion technologies raising the

potential for strengthening price links across fuels.

Figure 3-2 Coal conversion potential24

24Coal: Americas Energy Future, The National Coal Council. March 2006.


35/53


4 New Zealand coal priceand availability projectionsThe primary purpose of this section is to present modelling results of price and

availability projections for New Zealand out to 2049 under a range of scenarios.

To motivate the modelling framework designed for this project, and choices of

modelling parameters, this section relies on the discussion of past and likely future

trends in domestic coal demand and supply options covered in Sections 2 and 3.

4.1 Introduction

4.1.1 EC Brief

Provide several sets of coal price and availability projections for New Zealand for

the next 40 years (some around $/GJ per year and others around PJ/year) and

clearly specify the assumptions made (e.g. coal country of origin).

4.1.2 PB approachThe purpose of Sections 2 and 3 was to provide the context for the development

of modelling infrastructure and model parameterisation.

From previous discussion the interrelatedness of price and availability for

domestic purchasers of coal in New Zealand is manifest. Rather than facing, in

effect, an unlimited supply of coal at a fixed price, coal is available to cost-

minimising coal purchasers as a schedule comprising a series of price-quantity

pairs. The economics of the coal market in which domestic purchasers operate

means they confront an upward-sloping supply curve in which marginal purchases

can be made at non-decreasing prices. The model designed for this project does

two things: First, for a given set of assumptions, it produces a supply curve(comprised, itself, of price-quantity pairs) confronted by domestic purchasers; and

second, it shows the likely sources of supply given this supply curve and forecasts

of domestic demand.

4.2 Modelling

Modelling includes a base case reflecting expectations about availability and price

absent extraordinary market events, and four scenarios including:

Increased demand: Future coal demand increases at a faster rate due to

market forces such as a lower future gas supply resulting in increasing natural

gas prices.


36/53


Reduced demand: Future coal demand exhibits a negative growth rate as

Governments implement policies and strategies to move toward increased

generation from renewable power sources. Similarly, an abundant future

domestic gas supply promotes gas fuelled energy production at the expense

of coal demand.

Demand shift up: Clean coal technology advances will result in the

development of an IGCC plant being built in 2020, creating an upwards shift

in NZ thermal coal demand.

Demand shift down: The introduction of carbon charging and promotion of

renewable energy generation options in NZ results in the decommissioning of

Huntly power station (Units 1-4) in 2020.

4.2.1 Assumptions

Assumptions used in modelling the base case include:

All prices are in New Zealand Dollars and are based on long term coal

contracts.

The infrastructure is in place to import thermal (sub-bituminous) coal into the

North Island from the South Island or overseas.

The power station has the physical plant characteristics that allow it to burn

both sub bituminous and bituminous coals or a mixture of both and can

dispose of the waste products.25

There are no environmental constraints on the delivery and combustion of the

assumed quantities of coal at Huntly power station.

The Glenbrook steel mill continues to take coal from Huntly East.

Ceilings on coal prices are determined by:

Domestic gas prices

The price of imported coal

Costs of coal extraction both domestically and overseas

International prices for coal do change, but the availability of coal sourced

internationally is unlimited

4.2.2 Current prices

Current prices for sub-bituminous coal on a long term contract basis used for

electricity generation are assumed at $4/GJ. This is consistent with the estimated

value of the coal stockpile for Huntly derived from the Genesis Energy annual

report.26

Current contract prices for lignite are assumed at $2.00/GJ.

25We assume, further, that the consequence of this assumption does not lead New Zealand to consume its own production

of bituminous coals (which are exported). It does admit, however, the importation of bituminous but lower quality coalfrom overseas.26

http://activemagazine.smedia.com.au/Repository/GEN/2008/09/25/Genesis_AR%20final%20pdf%2018.9.08.pdf#OLV0_Page_0001
http://activemagazine.smedia.com.au/Repository/GEN/2008/09/25/Genesis_AR%20final%20pdf%2018.9.08.pdf#OLV0_Paghttp://activemagazine.smedia.com.au/Repository/GEN/2008/09/25/Genesis_AR%20final%20pdf%2018.9.08.pdf#OLV0_Pag


37/53


4.2.3 Analytical framework

The analytical framework used in modelling is relatively simple. Two supply

curves are produced each year: one each representing minimum prices and

associated supply quantities for domestic and overseas suppliers respectively.

The single supply curve confronting domestic purchasers thus comprises a given

quantity and the minimum price at which that quantity can be supplied.

Further, international supply is combined to resemble a single supplier (likely

either Australia or Indonesia). Relevant modelling variables are thus:

Initial sub-bituminous coal demand, set at current consumption (50 PJ)

Initial lignite coal demand, set at (10 PJ)

Domestic sub-bituminous coal demand growth, reflecting growth in coal used

in power generation and in steel making

2010 prices for domestic coal and overseas-sourced coal

Extraction cost growth both at home and abroad. This reflects resource

scarcity only and is passed through completely into growth in coal prices in

each market

Inflation both home and abroad, reflecting price changes independent of

scarcity, including transportation costs, wages costs and costs of capital.

4.2.4 Modelling limitations

Modelling design and assumptions were selected to produce realistic yet tractable

results. The constraints on modelling, however, lead to the following limitations:

Demand and cost growth smoothness. The model assumes constant

changes in demand and costs. In reality, changes in these factors are likely to

be variable and lumpy. As such, they are reflective of trends rather than

accurate year-specific forecasts.

Substitutability of bituminous for softer coals. The model assumes that

the bifurcation of New Zealands coal market persists. Technological

innovation, the discovery of new deposits or extraordinary changes in costs

(for example, in transportation) might render this assumption questionable.

World profile. Import schedules are, largely, treated as fixed in the model.Unlimited imports are possible at the going international rate. Major shifts in

the international market for example, a new supplier are assumed away.


38/53


4.3 Base case results

Assumptions included in the base case are:

Table 4-1 Base case assumptions

Notes

Initia l NZ coal de mand (PJ) 50.00

2010 first uni t home price ($/GJ) 4.00$

2010 first uni t abroad price ($/GJ) 4.05$

Coal demand growth 0.60% In line with elec demand growth unless coal share changes

Home inflation 1.10% Captures cost indexation indep of "effort to extract"

Abroa d infl ation 1.075% Captures cost indexation indep of "effort to extract"

Home extraction cost growth 0.70% Captures growth in difficulty in extraction effort. Can't be < 0

Abroad extraction cost growth 0.20% Captures growth in difficulty in extraction effort. Can't be < 0

Base case results are shown in the following set of charts27

:

Figure 4-1 Base Case: Price-availability supply curve

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

0 25 50 75 100 125 150 175 200 225 250

Offeredprice($/GJ)

Availability (PJ)

Bid Home 2010 Bid Home 2030 Bid Home 2049

Bid Abroad 2010 Bid Abroad 2030 Bid Abroad 2049

At the beginning of the forecast period prices are relatively low at $4.03/GJ for

smaller quantities, rising to $4.73 for the largest domestically supplied quantities.

By the end of the period, domestic prices begin at $6.20 and increase to $7.33 for

the largest quantities. As annual demand quantities increase, domestic supply

prices exceed international prices due to greater increases in extraction costs.

27Full size charts are included in Appendix A.


39/53


Figure 4-2 Base Case: Domestic supply and price

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

Price($/GJ)

Availability(PJ)

Home Abroad Price average Price max

Approximately 60% of demand is met from domestic sources in the early part of

the forecast period, but demand is increasingly met by overseas sources as time

progresses. By 2049, approximately 80% of domestic demand is met by imports.

Average prices over the forecast period range between $4.06 in 2010 and $6.18 in

2049.

4.4 Scenario analysis

4.4.1 Increased coal demand

If no significant new gas reserves are found, the demand for coal would increase

at a faster rate on the back of higher natural gas prices. A lack of bankable gas

supplies may prolong the life of Huntly power station fuelled on coal and promote

the commercialisation of clean coal technology options.

Assumptions included in the increased coal demand case are included in Table

4-2:


40/53


Table 4-2 Increased coal demand case assumptions

Notes

Initia l NZ coa l dema nd (PJ) 50.00

2010 first uni t home price ($/GJ) 4.00$

2010 first unit abroad price ($/GJ) 4.05$

Coal demand grow th 2.00% Faster demand growth due to reduced gas reserves future


Abroad infla tion 1.075% Captures cost indexation indep of "effort to extract"

Home extraction cost growth 0.70% Captures growth in difficulty in extraction effort. Can't be < 0

Abroad extraction cost growth 0.20% Captures growth in difficulty in extraction effort. Can't be < 0

Figure 4-3 Increased coal demand case: Domestic supply and price

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

Price($/GJ)

Avail

ability(PJ)


Demand is met approximately equally from domestic and international sources in

the early part of the forecast period, but demand is increasingly met by overseas

sources as time progresses. By 2049, approximately 90% of domestic demand is

met by imports. Average prices over the forecast period for purchases range

between $4.06 in 2010 and $6.21 in 2049.

Domestic supply of cheaper sub-bituminous coal is limited and the costs of

extraction will rise faster than for coal mined in countries such as Indonesia and

Australia. Thus the increased coal demand scenario reflects proportionately

increased quantities being supplied from international sources.

4.4.2 Reduced coal demand

Increases in future gas supply through either new gas field finds or importation of

LNG, or the introduction of carbon charging and carbon emissions reduction


41/53


targets may result in a declining annual coal demand. Although gas and coal are

not perfect substitutes in the short term, a slowing in gas price increases may

reduce the demand for coal especially when combined with a future which includes

a cost of CO2 emissions.

Assumptions included in the reduced coal demand case are:

Table 4-3 Reduced coal demand case assumptions

Notes

Initia l NZ coa l de ma nd (PJ) 50.00 PJ

2010 first unit home price 4.00$ $/GJ

2010 first unit a broa d price 4.05$ $/GJ

Coa l de ma nd growth -0.80% Reduced demand


Abroa d infla tion 1.075% Captures cost indexation indep of "effort to extract"

Home ex traction cost growth 0.70% Captures growth in difficulty i n extraction effort. Can't be < 0

Abroad extraction cost growth 0.20% Captures growth in difficulty i n extraction effort. Can't be < 0

Figure 4-4 Reduced coal demand case: Domestic supply and price

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

0.0

10.0

20.0

30.0

40.0

50.0

60.0

201

0

201

2

201

4

201

6

201

8

202

0

202

2

202

4

202

6

202

8

203

0

203

2

203

4

203

6

203

8

204

0

204

2

204

4

204

6

204

8

Price($/GJ)

Availability(PJ)


Demand is met approximately equally from domestic and international sources

over the forecast period, with imports gradually increa

pb coal study

Documents