Post-Recession Energy Demand Could Favor Coal

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". . .lending for coal plants will likely resume once clarity is reached on the carbon issue."

A study of recent recessions shows energy demand jumping as the economy improves. The same could occur at the end of this recession, said Bryan Hawthorne, manager of Project Development, Business 8c Technology Services for Burns 8c McDonnell. He spoke at the company's 10th annual Coal-Fired Symposium in May. Data from the last three recessions (1981, 1991 and 2001) show energy demand growing 8.5% on average over the five years following a recession's end. Assuming the trend holds this time, some 350 TWh of new capacity would be needed. Some, but not all, new capacity likely will come from wind and natural gas projects. New nuclear is unlikely to be a factor in the next five years, Hawthorne said. That means coal should remain in the mix for new baseload capacity. Given the time needed to permit and build a new coal plant, work should begin now to ensure enough baseload capacity is available. Additional investment should also be made to optimize existing coal plants, he said.

Credit markets are reopening for high quality projects, said J. Anthony Sprow, chairman and CEO of Dahlgren Group. Risk tolerance depends on how much power output is covered by long-term contracts; the willingness of engineering, procurement and construction (EPC) firms to shoulder risk; and carbon pass-through mechanisms. For projects $750 million in size and smaller banks might be willing to take a position as high as 30%, or around $125 million. Project size sweet spots lie between $300 and $400 million. For projects larger than $750 million, borrowers need to "lean heavily" on their relationship banks. And it's "unlikely" a consortium of banks could be put together for $1 billion in financing, he said. One recent project that large required 100 banks and "a lot of muscle'' to put together.

Sprow said lending for coal plants will likely resume once clarity is reached on the carbon issue. At a minimum, projects need a pass-through clause for the cost of carbon.

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