Cheap prices for coal are helping to generate unexpected profits at NB Power — despite carbon pricing — even though the utility's dependence on the fuel still promises significant financial problems in the years ahead.
In separate submissions in the last two months — one to the New Brunswick Energy and Utilities Board and one to the New Brunswick department of finance — NB Power has given notice this year's profits are running between $12 million and $24.6 million higher than originally budgeted.
If those numbers hold, it will be the first time the utility has exceeded its annual earnings target in five years.
A number of factors are contributing to the improvement, including an ongoing and unanticipated worldwide collapse in coal prices that has struck virtually all international producers, including NB Power's suppliers in Colombia.
Sergio Guzman, with the Bogata consulting company Colombia Risk Analysis, said in an interview the South American coal exporter has been coping with prices that began falling steeply late last year.
Demand for coal down
"Coal prices across the board have taken a slump because demand has taken a slump," said Guzman.
"You see major economies in Europe, such as Germany, such as the Netherlands, such as the U.K. cutting down on their consumption of coal and that generated an excess of coal, which you know suggests a price decrease."
NB Power imports all of its coal from Colombia and burns it alongside petroleum coke at its baseload plant in Belledune.
NB Power will not reveal specific prices it pays for coal and it is difficult to estimate. It hedges coal purchases with fixed price contracts and other financial instruments to protect itself from unexpected price increases, which also slow the receipt of benefits from price drops.
Nevertheless, the utility had budgeted at the start of the year to spend $126.1 million on coal, petroleum coke and other fuels, mostly for Belledune, but has since cut that estimate by $16.3 million.
The saving is equivalent to much of the improvement showing in the utility's bottom line.
Coal is NB Power's largest fuel cost, and earlier this year in its annual report, it noted price fluctuations have a significant effect on its bottom line.
"A $5 (per tonne) change in coal and petcoke prices will result in net earnings variability of approximately $2 to $7 million," it wrote.
As of Tuesday, according to the website Trading Economics, coal was trading at $72.22 US per tonne, $26.57 below prices one year earlier and $42 less than peak prices in October 2018.
Guzman says he sees no sign in Colombia of prices moving higher in the short term.
"What you see is a shift towards cleaner energy sources.and so that suggests that the trend in coal prices is going to continue its slump," he said.
Emissions will be costly
Despite the good news on prices, coal remains a significant worry for NB Power. It accounts for most of the utility's greenhouse gas emissions and in recent filings NB Power has said those emissions could add up to $67 million per year in costs by 2030 under maximum federal carbon pricing rates.
That's far beyond the savings low coal prices can generate. But in the short term, there has been an effect.
NB Power was budgeting for a $19.7 million profit this year, but in October, revised that estimate up to $44.3 million in filings with the Energy and Utilities Board.
That's a significant change from recent performance. In the previous four years, NB Power has averaged profits of just $20.3 million per year — $63 million per year below its annual targets.