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Seeking Consensus on the Internalized Costs of Coal

What is meant by “internalized costs”?

Internalized costs are the costs which can be accurately accounted for in our current systems. In energy production, these costs typically consist of capital costs, financing costs, operation and maintenance costs, and exploration costs. Some energy options incur these costs in various stages such as extraction, transportation and refinement. Profits and taxes are excluded wherever possible in order to isolate the pure cost of production.

Internalized costs related to coal can become very low. That is one of the main reasons why coal has thus far proven itself to be the standout energy source of the 21st century (figure below) despite rising prices, decades of talk about climate change and huge hype about alternatives. We will seek to better quantify these low internalized costs in this article.

Internalized costs of coal

The International Energy Agency has compiled the cost curve for global hard coal reserves shown below. It is important to note that the cost ranges given on the y-axis is the free-on-rail (FOR) cost which includes all costs except for long-distance transportation costs associated with international trade which can be large in countries like China and Russia. It should be mentioned, however, that less than 10% of Chinese coal is traded internationally.

(NOTE: It appears as if this IEA graph contains an error in converting $/tce to $/MBtu by assuming exactly 50 MBtu/tce. In reality, the value is about half this number.)

The current average cost of coal production is around $50/tce (ton coal equivalent) or $43/ton of average coal. It should also be noted that about 14% of global coal use is in the form of lower quality brown coal (lignite) which is substantially cheaper than the hard coal discussed above.

Breakdown of coal consumption

The bulk of global coal (61%) is used in the power sector (BP Energy outlook) and the rest is primarily used for industrial purposes. For transportation, coal-to-liquids processes are currently only responsible for about 0.4% of global oil-equivalent supplies, but will also be considered as the IEA predicts a rather impressive 8.8% yearly growth rate up to 2035.  

We will take a very brief look at all three of the above elements:


Since coal is fairly cheap, the cost of coal electricity is greatly influenced by the capital costs of the power plant. These costs vary greatly across the world depending, among others, on local material & labour costs and local legislation. The LCOE for different plant capital costs given by this study are shown below as a function of the coal price. Additional assumptions include a 40 year service life, 40% electric efficiency (supercritical technology), a capacity factor of 75%, a 7% cost of capital to reflect the predominantly developing world buildout and $6/MWh of O&M costs. Coal was assumed to yield a heating value of 23 GJ/ton. The Excel datasheet used to create this figure can be accessed here.


Because it is so cheap, coal is often used for supplying industrial heat. The two largest uses are steelmaking (where coking coal is also an essential reducing agent) and cement-making.  Coal for steelmaking purposes (coking coal) needs to be of higher quality than that used for general heat (steam coal) and commonly demands a market premium of 50-100%. The cost of coal per unit energy is shown below based on the assumption of a 23 GJ/ton heating value.


The IEA gives the cost of one barrel of oil-equivalent final fuel from coal-to-liquids processing as $40-100. One barrel contains about 159 litres (42 gallons). Based on this information, the cost per volume for liquid hydrocarbon final fuel from coal is shown below.


If you have a number that differs significantly from the estimates given above, please add it in the comments section below together with an explanation and a reference. 

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Schalk Cloete's picture
Schalk Cloete on Apr 15, 2014

DATA: Average free-on-rail coal cost: $50/ton.

This number is based on the IEA estimations in the article above.

Schalk Cloete's picture
Schalk Cloete on Apr 15, 2014

DATA: Average new coal plant cost: $1200/kW.

This is based on information that 76% of total planned coal capacity is to be added in India and China (with much of the rest being added in developing countries with similarly low costs). The $685/kW number in the article might a bit on the low side for China though because it was calculated shortly after the global recession and just adjusted to today’s dollars through standard CPI inflation. Hence the somewhat higher coal power capacity estimate. 

Schalk Cloete's picture
Schalk Cloete on Apr 15, 2014

DATA: Average LCOE of coal electricity: 36 $/MWh.

This is based on average coal costs of $50/ton, average new plant costs of $1200/kW and all the other cost assumptions outlined in the article. It is consistent with Chinese coal power costs calculated by the IEA in a report which compares to gas generation in a shale-gas boom scenario. 


Nathan Wilson's picture
Nathan Wilson on Apr 23, 2014

A LCOE of $36/MWh for coal is low, but note that when used along-side variable renewables, it’s the variable cost to which we must compare to the renewable.  For the numbers given, $50/ton at 23 GJ/ton, 40% efficiency, and $6/MWh O&M, the total is $25.6/MWh.

Schalk Cloete's picture
Schalk Cloete on Apr 25, 2014

True, but here we are just looking at all the internalized costs of coal energy. Even though US utilities are not deregulated so that full capital costs need to be recovered in the electricity price, the plant capital costs still need to be recovered in some way. And, as you know, coal plants are very expensive in the US (probably 3-4 times more expensive than in China/India). 

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