Why Natural Gas Could Save Coal
Natural gas is an increasingly abundant resource in the United States. It's so cheap that it's being integrated into the transportation sector, which sets the stage for lower fuel costs. That, in turn, could lead to cost savings for transporting coal by rail -- which would make coal used for power cheaper.
Gas is great!
Natural gas is a wonderful fuel because it burns more cleanly than coal. However, the usefulness of a fuel is a combination of cost, environment, and energy. In the United States, natural gas is cheap and abundant because of shale drilling. That's led a host of industries to convert to using gas.
For example, Waste Management has more than 2,200 natural gas powered vehicles and recently opened its 50th natural gas fueling station. Every natural-gas truck it buys means it avoids buying 8,000 gallons of diesel. No wonder the trash-hauling industry has made such a concerted shift toward natural gas, increasing such truck purchases from less than 10% of annual acquisitions to more than 60% in just five years.
Long-haul trucks are on the verge of following Waste Management and other trash haulers down a similar path. There's the potential to increase natural gas truck purchases from less than 1% of new purchases to more than one-third in the next five years.
United Parcel Service , for example, has made a commitment to purchase 1,000 long-haul trucks powered by liquefied natural gas. That will add to its already impressive total of more than 2,700 natural gas vehicles (most of which are not long-haul trucks).
How big a deal is this switch to LNG? United Parcel Service says that it can reduce fuel costs by 30% to 40% based on recent natural gas prices. No wonder Waste Management has been buying so many natural gas vehicles. And now that long-haul LNG trucks are increasingly available, including financing supported by a Clean Energy Fuels and General Electric partnership, it seems likely that the trucking industry is ready to start the shift, too.
But what about coal?
That's where trains come into play. GE is also working with CSX to test new gear that will allow a train to run on either natural gas or diesel. Assuming train companies pay about the same amount for fuel as truckers, that could lead to cost savings of up to 40% a year on fuel. Trains have run largely on diesel for around 50 years, so this switch is historic. And it sets up an interesting situation for coal.
According to the U.S. Energy Information Administration, trains transport about 70% of the coal electric utilities use, and transportation makes up about 40% of the end-cost of using coal. This makes rail costs a big part of the equation in the choice between coal or natural gas. Between 2000 and 2010, the cost to ship coal increased 50%. Companies like CSX didn't have much choice but to raise prices, however, because its costs were heading higher.
Assuming CSX and GE can make the switch to natural gas work, fuel-cost savings would likely be passed onto customers. At the same time, demand for natural gas will be increasing in the trucking (UPS) and train spaces, with an abundance of GE's help, which supports natural gas prices. Thus, the cost-benefit analysis might just start to favor coal in a more meaningful way.
Don't dismiss this scenario. The cost of natural gas in Germany has led gas-fueled power plants to operate at a loss. With cheap and abundant coal, U.S. utilities won't need much of a push to shift their mix back in favor of the fuel.
Watch UPS to see if it can follow the lead of Waste Management, which will provide further evidence that GE and CSX can pull off a similar train switch. If the dominoes fall right, the next five years could be good to coal.
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The article Why Natural Gas Could Save Coal originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels and United Parcel Service. The Motley Fool owns shares of CSX and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.