Feb 9 - McClatchy-Tribune Regional News - Peter Frost Daily Press, Newport News, Va.

Fast growth in global demand for U.S. coal is eating up part of the domestic supply that American utilities count on during peaks in power use That's boosting energy prices and threatening to hit consumers' pocketbooks.

The surge in U.S. coal exports, fueled by a combination of global economic and supply-chain factors, has doubled prices on coal for immediate delivery within the past 12 months, bringing them to their highest level in years. Because part of U.S. coal is purchased by power companies on the spot market, those higher prices could lead to increases in Virginians' monthly energy bills next year.

Industry analysts expect the surge in exports to continue through 2009, keeping supply tight and prices high for international and domestic buyers. With more than 50 percent of the nation's and Virginia's electricity generated by coal-fired plants, higher domestic prices are bound to lead to a consumer price bump.

"In this export spike, you're taking all this stuff that would normally be available (to domestic utilities), and it's gone -- it's being exported," Sean Casey said. Casey is an account manager for solid fuels for Pace, a global energy firm in Washington that advises utilities. "When you have to go out to the open market, you're going to have to pay a higher price than you what have had to pay before."

A majority of the coal used by power companies and utilities is purchased under long-term contracts that don't fluctuate with the market, but as much as 28 percent is bought on the more volatile spot market, according to government and analysts' estimates. Companies use the spot market as a hedge against changes in market prices.

If higher coal prices persist, power companies beset by higher costs typically pass along part of the burden to consumers, with a surcharge on their energy bills. Those increases, which most say should be no higher than 6 percent, would likely take until 2009 to go into effect because of the way that power companies set rates.

Dominion Virginia Power -- the state's largest and the area's primary electrical utility -- buys most of its coal under longer-term contracts and is "sufficiently hedged against these types of spikes," spokesman Dan Genest said. For competitive reasons, he declined to disclose specifically how much coal the company plans to buy this year on the spot market. But, he said, "Some years, it could be none; some years, it could be up to 20 percent."

For 2008, most of the coal that Dominion plans to burn for energy has been purchased under contract, so the high spot-market prices likely will not directly affect consumers, Genest said. Dominion also has some contracts that extend through 2009 and 2010, but the company is more exposed to spot-market prices in those years than it is now.

The company, Genest said, views the sharp rise in coal prices as a "short-term spike, not a long-term rise that will be permanent." Still, he said, "It's too soon to speculate on whether we'll seek to raise rates."

If the company does, the increase would have to be approved by the State Corporation Commission and wouldn't take effect until 2009. The utility raised rates in August by $3.39 a month for the average homeowner, about 4 percent, to cover years of escalating gas and oil costs. Fuel costs make up about 22 percent of a Dominion customer's monthly bill.

Likewise, other coal-consuming utilities -- including Atlanta-based Southern Co, one of the nation's largest generators of electricity -- project today's high coal prices to have little, if any, immediate effect on consumers. That's because coal used to fire electric power generation has largely been purchased for 2008.

But, said Mark Tyndall, a Southern Co. spokesman, if coal exports remain at boom levels over the next year -- as expected -- sustained high domestic costs could be passed along to customers in 2009.

If the price spike continues well into 2009, as most analysts project, utilities that have even a small part of their long-term contracts expiring -- or those that experience more high energy demand days than normal -- could be forced to pay higher prices on a larger percentage of their coal.

"This certainly leaves them more vulnerable," Frank Kolojeski said. He's managing director of TransGlobal Ventures Corp., a coal trader and logistics consultant based in New Jersey. "The way it looks now, a portion of that will be passed along to (consumers.) Maybe it won't be this calendar year, but in 2009, I'd guess rates will be up at least 4 to 5 percent."

Rising coal prices are a result of a confluence of global supply-chain problems and economic factors. A weak U.S. dollar, growing demand from developing countries like China and India, and mine shutdowns in Australia and South Africa combined to drive demand for American coal and boost prices nearly a third in the last two months.

Barry Worthington, executive director of the United States Energy Association, a Washington-based trade group, said despite coal's astronomical rise, the situation could have been much worse.

"A lot of facilities that were anticipated to be coming online in the last six or seven years are either delayed or going to be canceled," he said. The coal market "is not looking at the strong future growth rate it expected 12 months ago. That's counterbalancing pressure that international sales are having on the domestic market."

Indeed, in 2007, plans for more than 50 coal-fired power plants were killed or delayed due to concerns that stricter carbon legislation could be on the way with an administration change in Washington. Sweeping changes in pollution laws spurred by growing fears about global warming and climate change could render burning coal to produce electricity uneconomical. To add to the uncertainty, three large investment banks -- Citigroup, JPMorgan Chase and Morgan Stanley -- announced recently they would make financing more difficult to come by for new coal-burning plants that lack the ability to adapt to future carbon dioxide regulations.

Now much of that planned capacity could wind up supporting a long-term boom in the export market and, at the same time, keep prices at bay for domestic coal buyers, Worthington said.

"We can probably tolerate a significant increase in coal exports without having a dramatic impact on costs here," he said. "Coal as a fuel is still relatively moderately priced, compared with (natural gas.)"