Report#:DOE/EIA-0554(99)

Introduction

Macroeconomic Activity

International Energy

Household Expenditure

Residential Demand

Commercial Demand

Industrial Demand

Oil and Gas Supply

Natural Gas Transmission & Distribution

Petroleum Market

Coal Market

Renewable Fuels

The NEMS Coal Market Module (CMM) provides forecasts of U.S. coal production, consumption, exports, distribution, and prices.  The CMM comprises three functional areas:  coal production, coal distribution, and coal exports.  A detailed description of the CMM is provided in the EIA publication, Model Documentation: Coal Market Module of the National Energy Modeling System, DOE/EIA-MO60.

Key Assumptions

Coal Production

The coal production submodule of the CMM generates a different set of supply curves for the CMM for each year of the forecast.  Separate supply curves are developed for each of 11 supply regions, and 12 coal types (unique combinations of thermal grade, sulfur content, and mine type). The modeling approach used to construct regional coal supply curves addresses the relationship between the minemouth price of coal and corresponding levels of coal production, labor productivity, and the cost of factor inputs (mining equipment, mine labor, and fuel requirements).

The key assumptions underlying the coal production modeling are:

• Mining costs are assumed to vary with changes in mine production, labor productivity, and factor input costs.  Factor input costs are represented by projections of electricity prices from the Electricity Market Module (EMM) and estimates of future coal mine labor and mining equipment costs.  

• Between 1978 and 1997, U.S. coal mining productivity (measured in short tons of coal produced per miner per hour) increased at an average rate of 6.7 percent per year.  The major factors underlying these gains were interfuel price competition, structural change in the industry, and technological improvements in coal mining.81  Based on the expectation that further penetration of certain more productive mining technologies, such as longwall methods and large capacity surface mining equipment, will gradually level off, productivity improvements are assumed to continue, but to decline in magnitude. Different rates of improvement are assumed by region and by mine type, surface and underground.  On a national basis, labor productivity increases on average at a rate of 2.3 percent a year over the entire forecast, declining from an annual rate of 6.2 percent in 1997 to approximately 1.3 percent over the 2010 to 2020 period.  These estimates are based on recent historical data reported on Form EIA-7A, Coal Production Report, and expectations regarding the penetration and impact of new coal mining technologies.82

• Between 1985 and 1997, the average hourly wage for U.S. coal miners (in 1997 dollars) declined at an average rate of 1.1 percent per year, falling from $21.64 to $19.01.83  In the reference case, the wage rate for U.S. coal miners, is assumed to remain constant in 1997 dollars (i.e., increase at the general rate of inflation), as it has since 1993.

Coal Distribution

The coal distribution submodule of the CMM determines the least-cost (minemouth price plus transportation cost) supplies of coal by supply region for a given set of coal demands in each demand sector in each demand region using a linear programming algorithm.  Production and distribution are computed for 11 supply and 13 demand regions for 18 demand subsectors.

The projected levels of industrial, coking, and residential/commercial coal demand are provided by the industrial, commercial, and residential demand modules; electricity coal demands are provided by the EMM, and coal export demands are provided from the CMM itself.

The key assumptions underlying the coal distribution modeling are:

• Base-year transportation costs are estimates of average transportation costs for each origin-destination pair.  These costs are computed as the difference between the average delivered price for a demand region (by sector and for export) and the average minemouth price for a supply region. Delivered price data are from Form EIA-3, Quarterly Coal Consumption Report-Manufacturing Plants, Form EIA-5, Coke Plant Report-Quarterly, Federal Energy Regulatory Commission (FERC) Form 423, Monthly Report of Cost and Quality of Fuels for Electric Plants, and the U.S. Bureau of the Census’ Monthly Report EM-545.  Minemouth price data are from Form EIA-7A, Coal Production Report.

• Coal transportation costs are modified over time in response to projected variations in reference case fuel costs (No. 2 diesel fuel in the industrial sector), labor costs, the producer price index for transportation equipment, and a time trend.  The transportation rate multipliers used for all five AEO99 cases are shown in Table 61.

• Electric utility demand received by the CMM is subdivided into “coal groups” representing demands for different sulfur and thermal heat content categories.  This process allows the CMM to determine the economically optimal blend of different coals to minimize delivered cost, while meeting the sulfur emissions requirements of the Clean Air Act Amendments of 1990.  Similarly, nonutility demands are subdivided into subsectors with their own coal groups to ensure that, for example, lignite is not used to meet a coking coal demand

Table 61.   Transportation Rate Multipliers (1997 = 1.000)

Coal Exports

Coal exports are modeled as part of the CMM’s linear program that provides annual forecasts of U.S. steam and metallurgical coal exports, in the context of world coal trade.  The linear program determines the pattern of world coal trade flows that minimize the production and transportation costs of meeting a prespecified set of regional world coal import demands.  It does this subject to constraints on export capacity, trade flows, and sulfur emissions.

The CMM projects steam and metallurgical coal trade flows from 16 coal-exporting regions of the world to 20 import regions for 4 coal types (coking, low-sulfur steam, high-sulfur steam, and subbituminous).  It includes five U.S. export regions and four U.S. import regions.

The key assumptions underlying coal export modeling are:

• The coal market is competitive.  In other words, no large suppliers or groups of producers are able to influence the price through adjusting their output.  Producers’ decisions on how much and who they supply are driven by their costs, rather than prices being set by perceptions of what the market can bear.  In this situation, the buyer gains the full consumer surplus.

• Coal buyers (importing regions) tend to spread their purchases among several suppliers in order to reduce the impact of potential supply disruption, even though this adds to their purchase costs.  Similarly, producers choose not to rely on any one buyer and instead endeavor to diversify their sales.

• Coking coal is treated as homogeneous.  The model does not address quality parameters that define coking coals.  The values of these quality parameters are defined within small ranges and affect world coking coal flows very little.

Data inputs for coal export modeling:

• U.S. coal exports are determined, in part, by the projected level of world coal import demand.  World steam and metallurgical coal import demands for the AEO99 forecast cases are shown in Tables 62 and 63.

• Step-function coal export supply curves for all non-U.S. supply regions. The curves provide estimates of export prices per metric ton, inclusive of minemouth and inland freight costs, as well as the capacities for each of the supply steps.

• Ocean transportation rates (in dollar per metric ton) for feasible coal shipments between international supply regions and international demand regions. The rates take into account maximum vessel sizes that can be handled at export and import piers and through canals and reflect route distances in thousand nautical miles.

Table 62.  World Steam Coal Import Demand by Import Region, 2000-2020 (Million Metric Tons of Coal Equivalent)

Table 63.  World Metallurgical Coal Import Demand by Import Region, 2000-2020 (Million Metric Tons of Coal Equivalent)

Legislation

It is assumed that provisions of the Energy Policy Act of 1992 that relate to the future funding of the Health and Benefits Fund of the United Mine Workers of America will have no significant effect on estimated production costs, although liabilities of company’s contributions will be redistributed.  Electricity sector demand for coal, which represented 90 percent of domestic coal demand in 1997, incorporates the provisions of the Clean Air Act Amendments of 1990.  It is assumed that electricity producers will be granted full flexibility to meet the specified reductions in sulfur dioxide emissions.

Climate Change Action Plan

Provisions of the Climate Change Action Plan (CCAP) that concern coalbed methane recovery are incorporated in the Oil and Gas Supply Module.

Mining Cost Cases

In the reference case, labor productivity is assumed to increase at an average rate of 2.3 percent a year through 2020, while wage rates remain constant in 1997 dollars. Two alternative cases were modeled in the NEMS CMM, assuming different growth rates for both labor productivity and miner wages. In a low mining cost sensitivity case, productivity increases at 3.8 percent a year, and real wages decline by 0.5 percent a year. In a high mining cost sensitivity case, productivity increases by only 1.2 percent a year, and real wages increase by 0.5 percent a year. In the alternative cases, the annual growth rates for productivity were increased and decreased by mine type (underground and surface), based on historical variations in labor productivity during the years 1980 through 1997. Both cases were run using only the NEMS Energy Supply Modules (Oil and Gas Supply Module, Natural Gas Transmission and Distribution Module, Coal Markets Module, and Renewable Fuels Module), the Petroleum Market Module, and the Electricity Market Module, rather than as a fully integrated NEMS run. Consequently, no price-induced demand feedback in end-use coal markets was captured. In an integrated run, the demand response would tend to moderate the magnitude of the equilibrium price response.