Coal stocks at US power plants spark blackout fear

NEW YORK, May 7 (Reuters)

Coal supplies at U.S. power plants are at their lowest levels in more than three years, sparking concern of possible blackouts this summer when demand is heavy for electricity to power air conditioners.

CoalPeople.com, a coal industry newsletter, said supplies may be 10-20 percent lower than at this time last year, while National Mining Association experts believe that on average, coal-fired American plants have probably 40-45 days supply compared with 60-90 days which was normal in the 1990s.

Just last month, Peabody Energy Chairman and Chief Executive Officer Irl Engelhardt said reliability might become an issue at some plants, while hot weather in southern California this week once again highlighted how close America lives to an energy disaster like last August's monster blackout in New York and other eastern U.S. and Canadian cities.

"They (coal supplies) are much lower than they have ever been for some time," said Connie Holmes, senior economist at the National Mining Association. "You can only run down stockpiles so much. I am a bit surprised."

She said one reason for the reduction of coal supplies could be cost-cutting associated with deregulation. "They don't want to tie up so much money for so long."

Other factors are that many utilities built up reserves after the 2000-2001 California energy crisis and recent rail problems have disrupted coal deliveries in the East. In addition, recent high natural gas prices have had utilities opting to use up their coal.

The issue is significant because 95 percent of U.S. produced coal is used in U.S. power plants -- just over one billion tons last year, said Holmes. At the same time, coal comprises more than half of total U.S. generation.

Peabody Energy said last month that coal inventories at U.S. generators were estimated at approximately 110 million tons - their lowest levels since February 2001.

"The U.S. supply/demand balance for coal is very fragile," CEO Engelhardt said at the time. "We believe U.S. coal stockpiles are at such low levels that reliability may be an issue at some plants."

"Certainly with higher gas prices, owners of coal-fired power plants have tremendous financial incentive to get as much out of their plants as possible," said Peter Rigby, director of utilities, energy and project finance at Standard & Poor's.

Reliability is "on everybody's screen right now."

Jon Cartwright, head of institutional research at BOSC, Inc., said he did not know of a plant at risk of running out, "but at these kinds of price levels you just don't replace your inventories so quickly.

"If you do in fact get the kind of economic recovery that the recent numbers are suggesting and you get a hot summer, you are going to see very high electric prices."

Richard Hunter, managing director of the global power group at Fitch Ratings, said companies have been running down stockpiles as part of an efficiency drive.

The Alliance to Save Energy, a Washington-based advocacy group that encourages individual consumers and energy producers to be more efficient, said the blackout last August, showed just how vulnerable the power grid might be.

"There is tremendous concern over the issue, to avoid possible blackouts," said President Kateri Callahan. (Additional reporting by Carolyn Koo)

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