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Electricity and Coal

"We do not quit playing because we grow old, we grow old because we quit playing." ~ Oliver Wendell Holmes 1809-1894, American Author, Wit, Poet

Billion Kilowatt hours

Country 1980 1990 1995 2000 2003 2005 2006
Bermuda 0.29 0.43 0.46 0.55 0.58 0.61 0.62
Canada 309.6 433.63 466.38 504.48 528.13 541.25 529.95
Greenland 0.14 0.19 0.23 0.26 0.27 0.28 0.28
Mexico 56.66 100.22 122.05 167.25 171.76 189.98 195.91
United States 2,094.45 2,837.08 3,163.96 3,592.36 3,662.03 3,810.98 3,816.85
North America 2,461.15 3,371.59 3,753.11 4,264.95 4,362.82 4,543.15 4,543.66
France 236.75 324.44 369.02 411.93 437.3 451.81 447.27
Germany - - - - 483.48 505.04 532.5 545.76 549.06
Turkey 21.84 47.84 68.39 98.57 110.43 129.01 141.46
Russia - - - - 714.23 717.29 745.18 779.44 819.59
South Africa 85.52 144.71 161.69 180.73 199.85 211.19 201.88
China 261.49 549.34 876.43 1,177.89 1,678.77 2,195.10 2,528.95
India 97.9 219.88 318.28 375.39 428.18 483.29 517.21
Japan 523.72 776.49 896.62 946.3 936.6 979.82 982.46

The US has been generating over 49% of its electricity from coal for decades now and despite all the noise, we do not think this figure is going to change substantially soon. From 1980 to 2006, US electricity consumption has increased by 89%, which means that coal consumption increased by a similar magnitude, for the percentage of electricity generated from coal has remained somewhat steady throughout the years. The idea that solar, wind and other sources can immediately replace coal is a fallacy; it would take years for us to replace coal plants with a mixture of nuclear, solar and wind power plants. This would not address future demand and so bottom line, while coal is dirty, it is here to stay for years to come.

The two main players now are China and India; china now consumes more coal now than any other country in the world; to put this in perspective, China now consumes more coal than US and the Entire European union combined. Last year China consumed 2.62 billion tons, an increase of over 160% from 2000, when it consumed only 1 billion tons. By 2010, it is estimated that China will use approximately 3 billion tons; currently, China alone consumes roughly 1/3 of the worlds total coal output. Roughly, 70% of China's electricity is generated from Coal (1.93 trillion kilowatts), and it is still constructing roughly one new coal power plant a week. Even Though China has embarked on one of the most aggressive nuclear power plants building sprees ever, when all these plants are built, they will barely supply 5% of Chinas total electricity needs. Thus it's fairly easy to assume that coal will remain a major driving force of the Chinese economy for decades to come.

India is the 6th largest generator of electricity in the world, and it's also ranked as the 6th largest consumer worldwide. Over the past decade consumption has increased by over 64% and its projected increase in electricity consumption of 8-10% annually is one of the highest in the world. As with China and the United States, coal provides a major portion of India's electricity; currently, 69% of India's electricity is generated from coal.

In 1996 India consumed 295 million tons of coal; by 2005 the figure had jumped to over 465 million tons. From 2000 to 2005 India's coal usage increased by 5.5% a year; if we use the same projection, then in 2006 it consumed 490 million tons, in 2007 it consumed 516 million tons, in 2008 it consumed 544 million tons and by 2011 it will be consuming roughly 637 million tons; this off course is based on the assumption that consumption will continue to increase at a pace of 5.5% per annum and not spiral upwards.

The EIA Projects that India and China will account for 34% of the world's total increase in energy consumption worldwide and 85% of the world's total projected increase in coal usage between 1995 and 2020. China and India have increased their power output by 1000% and 500% respectively since 1980 and at the rate China is going; it will eventually surpass the United States. The only way it's going to be able to increase its output in a significant way it's to embrace every single source of energy out there and that includes coal.

These two countries are already operating well below optimal capacity; in fact, rolling black outs are the norm in both these countries and thus the question does not fall into the "if" category but the must category when it comes to the construction of new power plants. No matter how aggressively they build new nuclear, solar, or hydroelectric plants, they will still need to continue building coal fired plants in order to meet demand, which continues to increase at a record pace.

Hence even if by some miracle the U.S. could implement some plan in record time that would cut down the need for new coal plants, it would in no way affect long term prices because most of the world's electricity is still derived from coal.

There are several ways to play this sector, some more rewarding than the others, but the simplest way if you are bullish, would be to purchase shares in KOL, the coal ETF. As market conditions are currently far from normal, individuals should refrain from taking huge bites, but instead deploy their money in bits and pieces. Finally, one needs to take the long term view, for the short term ride is bound to be volatile.

"We should not pretend to understand the world only by the intellect; we apprehend it just as much by feeling. Therefore, the judgement of the intellect is, at best, only the half of truth, as must, if it be honest, also come an understanding of its inadequacy." ~ Carl Jung 1875-1961, Swiss Psychiatrist


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