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Archive for December, 2012

In John Ford’s 1941 flick, How Green Was My Valley, Walter Pidgeon, Maureen O’Hara and a very young Roddy McDowell portray the travails of life in a Welsh coal town. If Hollywood ever does a re-make (and the odds are better than even given the utter lack of originality in Tinsel Town), the miners may be protesting solar panels instead of cheaper labor brought in from outside of town.

That’s right, the Wales Pit Museum in Blaenafon (extra points if you can pronounce that one correctly), South Wales, a monument to Wales’ greatest natural resource and leading export, coal, has installed over 200 solar panels on the museum’s roof. According to the Daily Mail (UK) article, energy from the solar panels will be net metered. A spokesman said the panels will reduce both the museum’s energy bills and its carbon footprint. Of course, some wag might characterize the museum itself as a carbon footprint.

The importance of coal in English history cannot be overestimated. When James I (of Divine Right and King James Bible fame) took the throne in 1603, England was a backwater looked down upon by the Continent. By the time of the Battle of Omdurman (the last successful cavalry charge in military history, in which a young lieutenant named Winston Churchill participated) about three centuries later, it was a first-rate power with the largest navy and most extensive empire in history. Even during the height of the English Civil War, when the Scots Covenanter army crossed the Tweed and invaded England in 1643, they marched not on London, the political center, but on Newcastle, where England got all of its coal back then. And the Newcomen steam engine, which lit the fuse on the industrial revolution, was invented not to run locomotives, but to pump water out of coal mines that kept Londoners warm in the winter.

Ultimately, everything is always about energy.

Wales is one of the great coal mining centers of the world. Now the museum that marks that history is powered by solar. So, in the end Roddy McDowell’s valley did go green.

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Cheap natural gas from the shale/fracking boom, low prices for electricity due to the recession and soft demand, and new environmental regulations have combined to seal the fate of a number of coal-fired generating stations, as well as some coal mining companies.

Alpha Natural Resources, one of the nation’s largest miners of both thermal and metallurgical coal, got booted out of the Standard & Poor’s 500 earlier this fall. Edison Mission, owner of several coal-fired plants in Illinois, filed for bankruptcy protection earlier this week. And a few months ago we wrote about the bankruptcy of Patriot Coal.

All of the above factors, but principally the natural gas glut and low electric prices, have achieved the kind of results that environmentalists have sought for decades: the announced retirement of about 31,000 megawatts of coal-fired generation across the country. That’s about 10% of all coal-fired generation.

In many cases, retrofitting the coal plants to include carbon capture technology is not economically feasible when market power prices are this low. Natural gas plants emit about half as much CO2 as coal plants.

Coal plants cost more to run than natural gas plants. Most coal-fired plants were designed to run 24×7 as part of baseload generation, and these plants don’t just ramp up and down quickly to catch an occasionally favorable spot market price. It can take upwards of 12 hours to get the pulverizers (the coal is smashed into fine bits before being put in the burner), fires and boilers up to operating levels. It costs more to handle and transport coal (all by rail, not pipeline), and coal plants require more workers than do natural gas plants.

Natural gas also sets the electricity price margin in many markets, and when natural gas plants can sell juice at 2 cents per kilowatt hour, while coal plants must get 4-1/2 cents or more to break even, the arithmetic no longer works.

Most market analysts don’t see a resurgence in coal-fired generation until natural gas breaks through the four dollar ceiling. The NYMEX prompt month natural gas contract closed yesterday at $3.44/mmBtus, and in yesterday’s trading the contract didn’t reach the $4.00 mark until December 2013.

So how does one leave natural gas under a Christmas Tree? CNG?

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At first glance, J.P. Morgan Energy Ventures’ situation before the Federal Energy Regulatory Commission looks like a glorified discovery dispute. And that’s exactly what J.P. Morgan would like you to believe. But that’s just smoke. When Jamie Dimon suffered a multibillion trading loss with the London Whale, maybe he thought himself lucky to have a group of electricity traders who can make some of it back by gaming the California (and perhaps other?) electricity markets.

In this and a few other dockets, FERC has set itself the task of putting out yet another series of market conflagrations ignited by big banks.

The California Independent System Operator, or CAISO, operates the wholesale electricity market and transmission system for that state, and CAISO believes that J.P. Morgan manipulated the electricity market, imposing on California ratepayers anywhere from $100 million to $200 million in unjustified costs. CAISO accused J.P. Morgan of rigging its bids.

CAISO referred the matter to FERC’s enforcement office. Now, there is a provision of CAISO’s tariffs that provides that once such a referral is made, CAISO may not push its own investigation forward…unless FERC asks CAISO to do just that. And that, in fact, is what happened. Not only did FERC ask CAISO to continue to press forward on its investigation, FERC told both J.P. Morgan and its lawyers that it had done so, and not just once but three times.

J.P. Morgan and its lawyers obviously wanted to stall and delay FERC’s investigation, so they responded to FERC’s data (discovery) requests by stonewalling, insisting that CAISO no longer had jurisdiction or authority to request documents, even though J.P. Morgan had notice that this was not the case. J.P. Morgan and its lawyers wanted to give FERC the run-around, make them wait and work for it. Those kinds of lawyer vs. lawyer games are typical for discovery between private litigants.

But for J.P. Morgan and its lawyers to try to pull those shenanigans on the regulator? That represents a failure in judgment so abysmal and grotesque that one can conclude only that they are desperately trying to hide something rather large and malodorous.

FERC ultimately hit J.P. Morgan with an order suspending its market-based rate authority for six months. Let’s take a step back for a moment to understand what this means.

First, FERC is dealing with wholesale rates, not the retail rates that end-users pay. Retail rates and service are regulated by state utility commissions, and the retailing utility must generally show that those rates are “just and reasonable” by presenting evidence in administrative hearings. Rates and service for wholesale transactions by investor-owned utilities are regulated by FERC. All wholesale agreements and rate schedules (which include contracts affecting rates) have to be filed with the FERC, whicn may investigate them to make sure thay aren’t unjust, unreasonable, unduly discriminatory or preferential, etc. Any time a wholesaler proposes to change an existing rate, it must submit a filing under the Federal Power Act.
Since 1989, though, FERC has allowed certain entities, such as power marketers, to engage in wholesale sales of electricity at rates determined by the market rather than the wholesaler’s costs. The idea behind this authorization to power marketers was that they would increase the efficiency in power supply markets and ultimately lower the cost of electricity to consumers. J.P. Morgan, and Enron before them, show that things don’t always work out that way.
Starting in April 2013, J.P. Morgan will lose for six months its privilege to sell electricity at wholesale for market-based prices. The bank could still file proposed rates and go through a proceeding to establish them, but that’s extremely unlikely to happen. So although it’s not a death sentence, it’s well beyond solitary confinement.
Expect to hear the sound of more bank fanny slapping in the future.

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