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Assumption to the Annual
Energy Outlook
Coal Market Module
The NEMS Coal Market Module (CMM) provides forecasts
of U.S. coal production, consumption, exports, imports, 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, Coal
Market Module of the National Energy Modeling System 2004, DOE/EIA-M060(2004)
(Washington, DC, 2004).
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 capacity utilization of mines, mining
capacity, 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 capacity utilization
of mines, mining capacity, 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 1979 and 2002, U.S. coal mining productivity (measured
in short tons of coal produced per miner per hour) increased at
an estimated average rate of 5.9 percent per year. The major
factors underlying these gains were interfuel price competition,
structural change in the industry, and technological improvements
in coal mining.104 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 1.3 percent a year
over the entire forecast, declining from an estimated annual rate
of 1.4 percent between 2002 and 2010 to approximately 1.3
percent over the 2010 to 2025 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.105
- Between 1985 and 1993, the average hourly wage for U.S. coal
miners (in 2002 dollars) declined at an average rate of 1.5 percent
per year, falling from $22.89 to $20.32.106
During this same time period the producer price index (PPI)
for mining machinery and equipment (in 2002 dollars) declined
by 0.6 percent per year, falling from 168.5 to 161.2.107 In the reference case, both the wage rate for U.S. coal
miners and mine equipment costs are assumed to remain constant
in 2002 dollars (i.e., increase at the general rate of inflation)
over the forecast. This assumption reflects the more recent
trend in wages and mine equipment costs that has prevailed since
1993. In 2002, the average hourly wage rate for coal miners
was $19.04, and the PPI for mining machinery and equipment was
161.2.
Coal Distribution
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Table 68. Transportation Rate Multipliers
(Constant Dollar Index, 2002=1.000)
Printer Friendly Version 
| Year |
Reference Case |
High Oil Price |
Low Oil Price |
High Economic Growth |
Low Economic Growth |
| 2002 |
1.0000 |
1.0000 |
1.0000 |
1.0000 |
1.0000 |
| 2005 |
0.9353 |
0.9507 |
0.9197 |
0.9532 |
0.9273 |
| 2010 |
0.9239 |
0.9359 |
0.9125 |
0.9759 |
0.8928 |
| 2015 |
0.8756 |
0.8841 |
0.8672 |
0.9390 |
0.8208 |
| 2020 |
0.8216 |
0.8239 |
0.8149 |
0.8984 |
0.7495 |
| 2025 |
0.7581 |
0.7588 |
0.7547 |
0.8560 |
0.6804 |
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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 using a linear programming algorithm. Production
and distribution are computed for 11 supply (Figure 10) and 14 demand
regions (Figure 11) for 49 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;
coal imports are determined exogeneously, 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 curve. Delivered price data are from
Form EIA-3, Quarterly Coal Consumption Report-Manufacturing
Plants, Form EIA-5, Quarterly Coke Consumption and
Quality Report, Coke Plants, Form EIA-423, Monthly Cost
and Quality of Fuels for Electric Plants Report, 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.
- A two-tier transportation rate structure is used for those
regions which, in response to rising demands or changes in demands,
may expand their market share beyond historical levels. The
first-tier rate is representative of the historical average transportation
rate. The second-tier transportation rate is used to capture the
higher cost of expanded shipping distances in large demand regions.
The second tier is also used to capture costs associated
with the use of subbituminous coal at units that were not originally
designed for its use.
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 user cost of
capital for transportation equipment, and a time trend. The
transportation rate multipliers used for all five AEO2004
cases are shown in Table 68.
- Coal contracts in the CMM represent a minimum quantity of a
specific electricity coal demand that must be met by a unique
coal supply source prior to consideration of any alternative sources
of supply. Base-year coal contracts between coal producers
and electricity generators are estimated on the basis of receipts
data reported by electric utilities on FERC Form 423, Monthly
Report of Cost and Quality of Fuels for Electric Plants, and
by nonutility generators on Form EIA-423, Monthly Cost and
Quality of Fuels for Electric Plants Report. Coal contracts
are specified by CMM supply region, coal type, demand region,
and whether or not a unit has flue gas desulfurization equipment.
Coal contract quantities are reduced over time on the basis
of contract duration data reported by electric utilities on FERC
Form 580, “Interrogatory on Fuel and Energy Purchase Practices”
and information obtained from various coal and electric power
industry publications and reports.
- Electric generation 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, nongeneration 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.
- Projections of annual U.S. coal imports, specified by demand
region and economic sector, are developed exogenously. The
forecast is based primarily on the capability and plans of existing
coal-fired generating plants to import coal and announced plans
to expand the coal import infrastructure. Projections of
coal imports do not vary across the alternative AEO2004 forecast
scenarios. Total sulfur dioxide emissions from imports and
domestically produced coal are subject to the restrictions on
emissions specified in the CAAA90.
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 and trade flows.
The CMM projects steam and metallurgical coal trade
flows from 16 coal-exporting regions of the world to 20 import regions
for three coal types (coking, bituminous 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 disruptions, even though this may add 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:
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Table 69. World Steam Coal Import Demand by Import Region, 2001-2025
(Million metric tons of coal equivalent)
Printer Friendly Version
| Import Regions1 |
20012 |
2005 |
2010 |
2015 |
2020 |
2025 |
| The Americas |
38.5 |
45.0 |
50.3 |
56.1 |
59.7 |
60.5 |
| United States |
15.7 |
20.6 |
27.6 |
31.6 |
35.2 |
38.8 |
| Canada |
15.0 |
12.4 |
11.0 |
10.2 |
9.8 |
6.3 |
| Mexico |
2.1 |
6.0 |
6.4 |
6.6 |
7.0 |
7.7 |
| South America |
5.7 |
6.0 |
5.3 |
7.7 |
7.7 |
7.7 |
| |
| Europe |
132.5 |
135.7 |
145.1 |
138.8 |
134.5 |
132.0 |
| Scandinavia |
11.7 |
8.4 |
5.6 |
4.3 |
3.6 |
2.9 |
| U.K/Ireland |
25.1 |
24.1 |
26.1 |
25.0 |
24.1 |
23.5 |
| Germany/Austria |
15.4 |
17.9 |
21.5 |
22.4 |
24.2 |
26.0 |
| Other NW Europe |
24.1 |
22.5 |
21.2 |
14.5 |
11.0 |
9.3 |
| Iberia |
19.4 |
25.3 |
27.4 |
26.5 |
24.7 |
22.9 |
| Italy |
11.4 |
11.3 |
11.3 |
11.3 |
9.7 |
9.3 |
| Med/E Europe |
25.4 |
26.2 |
32.0 |
34.8 |
37.2 |
38.1 |
| |
| Asia |
195.0 |
226.1 |
261.6 |
279.0 |
304.4 |
320.1 |
| Japan |
72.2 |
83.3 |
96.0 |
101.5 |
106.9 |
112.3 |
| East Asia |
84.3 |
94.3 |
106.1 |
109.7 |
121.6 |
126.1 |
| China/Hong Kong |
9.8 |
9.7 |
14.5 |
19.0 |
23.6 |
25.4 |
| ASEAN |
15.5 |
23.9 |
28.5 |
30.5 |
32.2 |
33.5 |
| Indian Sub |
10.2 |
14.9 |
16.5 |
18.3 |
20.1 |
22.8 |
| Total |
366.0 |
406.8 |
457.0 |
473.9 |
498.6 |
512.6 |
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Table 70. World Metallurgical Coal Import Demand by Import Region, 2001-2025
(Million metric tons of coal equivalent)
Printer Friendly Version
| Import Regions1 |
20012 |
2005 |
2010 |
2015 |
2020 |
2025 |
| The Americas |
20.6 |
23.3 |
25.9 |
27.7 |
29.3 |
29.4 |
| United States |
2.1 |
2.3 |
2.3 |
2.3 |
2.3 |
2.3 |
| Canada |
3.9 |
4.7 |
4.6 |
4.4 |
4.2 |
4.0 |
| Mexico |
1.1 |
1.3 |
2.3 |
2.9 |
3.8 |
4.0 |
| South America |
13.5 |
15.0 |
16.7 |
18.1 |
19.0 |
19.1 |
| |
| Europe |
53.4 |
53.3 |
52.9 |
51.4 |
49.6 |
49.1 |
| Scandinavia |
3.3 |
2.8 |
2.8 |
2.8 |
1.8 |
1.6 |
| U.K/Ireland |
10.4 |
7.7 |
7.7 |
7.2 |
7.2 |
7.2 |
| Germany/Austria |
3.6 |
6.4 |
7.0 |
7.0 |
7.0 |
7.0 |
| Other NW Europe |
16.6 |
15.2 |
13.4 |
12.4 |
11.4 |
10.9 |
| Iberia |
4.4 |
4.5 |
3.9 |
3.9 |
3.9 |
3.9 |
| Italy |
8.6 |
7.3 |
7.2 |
6.4 |
6.4 |
6.4 |
| Med/E Europe |
6.5 |
9.4 |
10.9 |
11.7 |
11.9 |
12.1 |
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| Asia |
109.0 |
109.4 |
109.4 |
111.7 |
113.5 |
116.3 |
| Japan |
69.2 |
63.5 |
59.6 |
58.2 |
56.7 |
54.8 |
| East Asia |
25.6 |
28.1 |
31.4 |
33.4 |
35.7 |
37.6 |
| China/Hong Kong |
0.0 |
0.6 |
0.6 |
0.6 |
0.6 |
0.6 |
| ASEAN |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
| Indian Sub |
14.2 |
17.2 |
17.8 |
19.5 |
20.5 |
23.3 |
| Total |
183.0 |
186.0 |
188.2 |
190.8 |
192.4 |
194.8 |
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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 AEO2004 forecast cases are
shown in Tables 69 and 70.
- 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 dollars 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 thousands
of nautical miles.
Coal Quality
Each year the values of base year coal production,
heat, sulfur and mercury (Hg) content and carbon dioxide emissions
for each coal source in CMM are calibrated to survey data. Surveys
used for this purpose are the FERC Form 423, a survey of the origin,
cost and quality of fossil fuels delivered to electric utilities,
the Form EIA-423, a survey of the origin, cost and quality of fossil
fuels delivered to non-utility generating facilities, the Form EIA-5 which records the origin, cost, and quality of coal receipts
at domestic coke plants, and the Form EIA-3, which records the origin,
cost and quality of coal delivered to domestic industrial consumers.
Estimates of coal quality for the export and residential/commercial
sectors are made using the survey data for coal delivered to coking
coal and industrial steam coal consumers. Hg content
data for coal by supply region and coal type, in units of pounds
of Hg per trillion Btu, shown in Table 71, were derived from shipment-level
data reported by electricity generators to the Environmental Protection
Agency in its 1999 Information Collection Request. The database
included approximately 40,500 Hg samples reported for 1,143 generating
units located at 464 coal-fired facilities. Carbon dioxide
emission factors for each coal type are shown in Table 71 in pounds
of carbon dioxide emitted per million Btu.108
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 92 percent of domestic
coal demand in 2002, 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. The reference case excludes any
potential environmental actions not currently mandated such as mercury
reductions or other rules or regulations not finalized.
Mining Cost Cases
In the reference case, labor productivity is assumed
to increase at an average rate of 1.3 percent per year through 2025,
while wage rates and mine equipment costs remain constant in 2002
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 2.9 percent per year, and real wages and mine equipment
costs decline by 0.5 percent per year. In a high mining cost
sensitivity case, productivity decreases by 0.6 percent per year,
and real wages and mine equipment costs increase by 0.5 percent
per year. In the alternative cases, the annual growth rates for
productivity were increased and decreased based on historical variations
in national average labor productivity. Both cases were
run as fully integrated NEMS runs.
Notes and Sources
Released: February 2004
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