Coal poised to make a comeback in electricity generation

Pittsburgh (Platts)--27Sep2005

The first two speakers at Platts Coal Marketing Days conference in Pittsburgh
on Monday pointed to a recently widened and enhanced window of opportunity for
the coal industry, one through which they hope to see 50,000 MW-60,000 MW of
new electric generating capacity by 2010 from an easing of state and federal
regulations.

But, they hope, environmentalists can see the need for coal-fired generation
to be at the forefront of such development.

Morning moderator Mark Morey, director of North American Power at Cambridge
Energy Research Associates, said coal's role as a low-cost, stable, reliable
source of energy is finally being heard, due to the high cost of natural gas,
which has jeopardized the economic viability of gas-fired merchant power
plants.

While the opportunity is there for coal, it will require the construction of
new coal-fired plants, when the use of coal feedstock has essentially maxed
out, having added just 6,000 MW of coal-fired generation since 1990, a period
that spawned a tremendous growth in gas-fired generation. "The problem is that
a lot of that [gas-fired] capacity at $10 gas doesn't run very well, and it
certainly isn't going to meet some of the economic needs that we have in our
country today," Morey said.

The price differentiation, which favored natural gas in the 1990s and worked
against any argument for new coal-fired plants, was aided by governmental
regulators' view of gas-fired generation as being easy to site, relatively
inexpensive to build, and requiring less space and water resources. The early
results, noted American Electric Power Chairman, President and CEO Michael
Morris, was "$30-$40 power, which really worked quite nicely in the market ?
for the time line they saw.

"What those people didn't understand is that [it was] going to put tremendous
pressure on the gas supply model in this country, and now we're looking at
$7-$9 gas, and $17 gas after Katrina and Rita. That makes $120 power, so not
many of those plants are running. The fact of the matter is that no new
merchant plants will be built of the ilk that were built in the last four to
five years. Merchant plants as we knew them are simply dead," he said, noting
the necessity for future power plants to have pre-construction power purchase
agreements and long-term fuel supply contracts in hand, factors which favor
coal.

In agreeing with Morey's assessment that a golden opportunity now exists for
the coal industry, Morris pointed to coal's ability to offer long-term fuel
supply contracts as the way to go.

"We need you as a partner, and we champion you in the prospects that you have
to open up new production facilities. We are interested in signing up people
who are looking for baseload offtake for a new coal mine. If all of you hope
to win in the spot market, someday you'll die in the spot market," Morris
said. AEP is willing to enter into long term coal contracts "with some pricing
flexibility for you and for us, tied to a number of fuel sources and tied to a
basket of competitive energy prices."

Morris went on, though, to advise potential AEP coal suppliers of certain
utility expectations. "In the near term we expect you to perform on your
contract. Some of you have, and some of you haven't. You found others who
wanted to buy your coal. Contracts are signed for the benefit of both parties
and need to be lived up to in good times and in bad times. You might enjoy
near-term benefit from 'price majeure', but it's wrong."

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