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Coal Myhts and Environmental Realities: Industrial Fuel-Use Decisions in a Time of Change

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Two inconsistent myths persistently surround industrial use of coal. The first myth is that the clean air act effectively precludes use of coal whether through the high costs of compliance or through outright prohibitations. This concern is captured in the aphorism, coal is a wonderful fuel except you can’t mine it or burn it. The second myth or at least a major forecasting error is that industrial use of coal will expand rapidly. Many future energy projections estimate industrial use of coal doubling or tripling over the next decade, even in the face of declining use since world war II. This study comes to opposite conclusions.rnIt is widely perceived that environmental standards cut use in the 1960s and made it increasingly difficult to use coal in the 1970s. Clearly, one major objection to the clean air act has been its presumed chilling effect on coal use. In fact, there were perfectly logical economic reasons for coal’s small and diminishing share of the industrial market at least until the large world oil price increases resulting from the Iranian revolution. Historically, the sift away from coal occurred because oil and natural gas were cheaperto use, more convenient, and cleaner. Even with today’s higher oil and gas prices, which make coal much more economically attractive, environmental standards play a small role in industrial fuel use decisions.rnThe review of a large number of U.S. manufacturing firms found that environmental requirements killed only one project and seriously discouraged only one other the first because the requirements made the project too costly, and the second because the firm feared delays in gaining a permit. By contrast, firms such as Du Pont, General Motors, and ideal cement pursued aggressive coal conversion programs, and other firms converted at least some of their plants. This does not mean that environmental controls are not costly, some times time-consuming, and certainly a nuisance to business, it does mean that they were not the major barrier to coal conversion.rnIf environmental requirements played such a minor role, why has industrial use of coal fallen so short of expectations? Some of the lag may be explained by the downturn in use of metallurgical coal related to lower demand for steel, the declining economics of coke production, and changes in the mix of processes used for steel production. But this does not explain the drop in the amount of coal used for industrial boilers. While generally poor economics discouraged coal conversions, at least until the oil price spiral in 1979-1980, there were certainly many more economic conversion candidates available than actual conversions. From this study, it found most conversions were initiated by some external event, such as unrealibility of natural gas, expiring natural gas contracts, or new environmental requirements not a hard look at the economics of using coal.rnCoal has had and will continueto have a low share of the industrial fuel market because of the way U.S. businesses view fuel use choices. For most U.S. firms, energy costs are relatively small portion of total costs and a minor factor in a firm’s ability to compete. Faced with alternative capital projects to expand productive facilities or to make mandatory investments, coal conversion projects are generally not given high priority. Moreover, most U.S. firms have little experience with burning coal, creating additional psychological and institutional barriers to investments in coal conversion projects. Finally, firms tend to prefer high payoff, short terms investments to projects that promise cost savings many years in advance, particularly when those investments are unrelated to a firm’s normal business operations. These are all strong reasons for coal’s current lackluster performance in the industrial market. But there were different reasons in the past.rnCoal use began its downward spiral in the industrial sector after world war II. Coal was driven from industrial markets because its competitors oil and natural gas were cheaper and more convenient to use. Oil initially replaced coal in industrial use. As the natural gas pipeline system expanded outside producing areas, gas slowly became the dominant fuel for industrial operations. After 1966, when the oil import quota was lifted for residual fuel oil, oil became cheaper than coal as a fuel in the northeast. Plants, originally designed to burn coal were switched to oil, eventhough higher capital expenditures had been made to burn coal in the first place. Once conversion to oil was complete, states were able to tighten their emission standards, making it difficult to switch back to coal.rnDespite strong national policy to increase coal use, coal actually lost ground after the Arab oil embargo. Because of an unusual coal price increase in 1974 and price controls on crude oil, coal’s relative economic position declined. Since 1978, however, coal economics have changed dramatically. The energy tax act of 1978 added a 10 percent investment tax credit to the one then in existence and eliminated the tax credit for oil or natural gas boilers, giving coal boilers a 20 percent investment tax credit advantage. Sparked by the Iranian interruption, the price of Saudi light crude rose from $12.75 per barrel to $34.00 per barrel by October 1981, raising the price of oil products and, indirectly, natural gas prices. The full impact of this large price increase was passed on to consumers when crude oil prices were finally decontrolled in early 1981. Industrial natural gas prices are now rising rapidly, soon they will be equivalent to residual fuel oil prices. Finally, the economic recovery tax act of 1981 allows five year depreciation for boilers, which helps coal relative to other fuels since coal use requires much larger, capital expenditures.rnThese changes have improved coal’s economics measurebly. Coal has economic advantage over oil in most boiler applications, and once industrial gas prices reach the price of oil substitutes, it will have similar advantages over natural gas. If economics were the only basis for industrial fuel use decisions, coal’s future would be brighter.rnClassical economics clearly fails to describe the motivations for industrial firms to use coal. The gap between the economic analysis detailed in chapter 2 and the reality of coal use can be explained by the behavioral and strategic impediments to coal use described in the industrial fuel use model developed in chapter 3. That model attempts to bridge the intellectual gap between modelers and those who are interested in the behavioral aspects of individual decisionmaking, it tries to explain the historical gap between econometric prediction and management behavior. The model describes four stages in the firm’s decision making process, concentrating on those factors most important at each stage of the process. Based on many interviews and studies the model helps explain some of the most important reached in this study.rnAn industrial firm’s decision whether to consider a certain facility for coal conversion is the single most important step in the process. Most facilities with characteristics favorable to coal use, such as large size or good transportation links, have never ever been reviewed for their economic potential. Only a few firms systematically review their facilities for fuel switching potential. Unless firms have immediate competitive pressures to use coal, have high energy costs as a percentage of total costs, or have past favorable experience with coal, they are not likely to examine the possibilities for conversion without some form of external pressure. At this early stage, a decision to review fuel use entails a commitment of management time, in some cases, is as precious as capital.rnIn most of the cases examined in this study, some external event, such as a plant expansion, an expiring natural gas contract, or a pollution compliance order, virtually forced the firm to review its fuel use pattern. Only in the cement industry were economic forces inexorably pushing toward coal use. Because fuel use generally plays such a small part in the competitive realationships among firms, most economically viable coal conversion projects are never uncovered.rnThe firm’s second critical decision point comes at the stage of capital budgeting. Since most coal conversions are large capital intensive projects, managers must grapple with a range of strategic issues when a coal conversion project is at stake. They must weigh coal conversion projects against all other company priorities. They must allocate management time and attention to an activity outside the mainstream of their companies’ business, one in which most firms have little or no experience. They must be willing to forego some productive investments or rise more debt and equity capital, often at the expense of diluting stock value and reducing credit ratings. And they must be willing to make commitments to retaining production at converted facilities for some time.rnDespite these barriers, some conversions are indeed made. As noted, firms in the cement industry have been forced to convert by competitive pressures, and firms in the pulp and paper industry have felt some pressure to reduce oil and gas use. In a few cases where firms have developed experience using coal, they have been encouraged to be more aggressive in using fuel switching as a strategy to reduce energy costs. Other firms in the same industry without experience using coal would blanch at such a strategy.rnOverall, the industrial fuel use decision making process is biased against coal. When interest rates are high profits are low, manufacturing firms cannot afford the large capital expenditures that coal conversion projects requires. When the level of economic activity expands, most firms rush to expand their production lines or develop new products using their greater cash flow for productive investments. In most industries, fuel costs do not represent a sufficiently large percentage of total costs to induce companies to allocate large amounts of capital and management time to coal conversion. Without strong competitive pressures to reduce fuel costs beyond what can be achieved by conservation industrial coal use will fall short of expectations.rnAlthough environmental requirements are not the primary obstacle to greater industrial use of coal, they do raise costs, cause delays, and add to the uncertainty of coal use. In the past, environmental costs have been relatively small, electrostatic precipitators, for example, add about 10 percent to the capital costs of using coal but less than 5 percent to the total costs. If stack gas scrubbers are required, environmental costs would make up a third of capital costs and result in a substantial increase in operating costs for a moderate seized boiler. Currently, most industrial users meet environmental emission standards through the use of low sulfur coal, which purchase at a small premium.rnPermit delays were not a major factor in determining fuel use choices. In the majority of cases, permits were received within planned time periods, although for some firms, the period could be as long as three years if no previous monitoring had been conducted. For many firms, delays would cost more money and management time, but would have no other serious impacts. Delays were a more serious problem in highly competitive industries, however, where success often depends on speed and secrecy. In these industries, a protracted permitting process gives competitors an opportunity to develop countervailing strategies. Recognizing this threat, some firms have eliminated potential coal conversion sites. rnUncertainty was not nearly as serious a barrier to coal conversion as often touted. Most industry environmental staffs are well informed about what is expected from regulatory agencies. This is particularly true in the south, where most potential for coal conversion exists and in which environmental agencies are generally accommodating. Firms expressing most uncertainty were usually those with little experience using coal. One firm with extensive experience actually sped up a project to prevent potential future shifts in government policy, it assumed that once the permit was received, it would be grandfathered against future regulatory changes.rnEnvironmental requirements could be more limiting in the future. Clean air act limits, designed to protect air quality in areas of the country not violating ambient air quality standards, could become binding not only on coal conversion, but in some limited cases, on economic development in general. These Prevention of Significant Deterioration (PSD) limits could be particularly troublesome in the southwest, with its massive concentration of industry, and in hilly terrain, where difficult meteorological conditions prevail. But no one knows how serious an impediment PSD will become until detailed studies are conducted at specific sites. In some cases, a modest change in location or reduction of pollution from other sources at the plant would allow coal to be burned. For those cases where coal simply cannot be burned and alternative sites or offsets are not available, natural gas will generally be available. Since so much industrial growth is occurring in the south and southwest, which are also major natural gas producing areas, oil will generally not be the option chosen.rnThis study approached the impact of environmental requirements on industrial fuel use decisions from a number of angels. The first chapter looks at the history of industrial energy use in the United States, focusing on the period from 1951 to 1981. It also explores the role of government policy in fuel use decisions, particularly since 1973. Chapter 2 reviews the economics of coal and oil use in boilers before and after the Iranian revolution and with and without stack gas scrubbers. The third chapter reviews the factors that influence industrial fuel use decisions, developing a model of corporate fuel use decision making. In many respects, this chapter provides the most original insights from this study. The fourth chapter reviews how environmental factors influence fuel use decisions and the options available to industry for overcoming potential environmental restrictions. The final chapter reviews the importance of coal use and conversion as an overall part of national energy policy and suggests ways to overcome barriers to coal use.rnThe study employs case studies as the basic methodological approach. Detailed case studies of ten firms were buttressed with interviewa with a large number of industry officials. In addition, a mathematical model was employed to evaluate the economics of using coal or residual fuel oil.rnThe study’s focus on coal conversions was chosen for a number of important reasons. First, conversions offer great potential for reducing oil and gas use, industrial boilers use about 10 percent of U.S. primary energy. Second, although coal will often be attractive for new facilities, it is not clear that many greenfield manufacturing facilities will actually be built in the United States for some time at least in major energy using industries. Most basic U.S. manufacturing industries face stagnant demand and excess capacity. Even in expanding industries, it is likely that most growth will occur at existing sites. Since most firms currently have spare steam capacity, they can choose to meet part of their steam requirements from spare capacity and the rest from new oil or gas boilers. In a sense, many decisions on fuel use for expanding facilities resemble a conversion decision. The firm must decide to scrap existing oil and natural gas boiler of the nature of these decisions, this report focuses on conversions from oil and gas to coal and sometimes wood in which oil and gas boilers would be retired.rn

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Ketersediaan

090100140

Tersedia

Informasi Detil

Judul Seri

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No. Panggil

662.66 Alm c

Penerbit

Westview Press : Colorado., 1984

Deskripsi Fisik

xvii, 154 p.

Bahasa

English

ISBN/ISSN

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Klasifikasi

662.66 Alm c

Tipe Isi

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Tipe Media

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Tipe Pembawa

-

Edisi

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Subyek

Coal Trade-Government Policy; Fossil Fuels-Environ

Info Detil Spesifik

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Pernyataan Tanggungjawab

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Versi lain/terkait

Lampiran Berkas

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