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Is Coal Down For The Count

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by J. Matthew Derstine

Last week Peabody Energy announced that it filed bankruptcy.  Peabody is the nation’s largest coal company.  The filing by Peabody comes on the heels of the January 2016 bankruptcy filing by Arch Coal, the nation’s second largest coal producer.  Over 26 coal companies have gone bankrupt in the past several years and now, with the filings by Arch and Peabody, there are serious questions about the future of the U.S. coal industry.

The collapse of the coal industry has been largely driven by a steep decline in the demand for thermal coal by the U.S. electricity generators.  Use of coal for power generation represents over 90% of U.S. coal consumption.  But coal consumption by power generators has been dropping and last year coal consumption by generators hit its lowest point since 1991.  While there are a variety of factors that play a role in the decline of coal consumption by U.S. power generators, the two main drivers are cheap natural gas and federal regulation.

Natural Gas.

The shale gas revolution – the use of horizontal drilling and hydraulic fracking techniques – has given rise to a dramatic increase in domestic natural gas production and this supply boom has caused a dramatic drop in natural gas prices.  The current price of natural gas is less than $2.0 MMBtu, down $10 from the June 2008 peak of over $12 MMBtu. And there is no sign of natural gas prices returning to the highs of the mid 2000’s.  The Energy Information Administration (“EIA”) estimates that the United States has 87 years of natural gas reserves at current consumption rates.

This glut of cheap natural gas has prompted power generators to build new gas-fired power plants, a move that locks in the preference for natural gas over coal for years to come.  In 2013, natural gas represented more than 50 percent of new power generating capacity.  Forecasts predict that this year, for the first time, natural gas-fired generation capacity will exceed coal generation in the United States on an annual basis.  Cheap natural gas is also prompting generators to accelerate the retirement of older coal plants. More than 60 percent of coal-fired power plants are over 40 years old and given the abundance of cheap natural gas, some generators are electing to retire their coal plants ahead of schedule.

Federal Regulation.

But cheap natural gas is not the only factor causing the decline of coal-fired generation in the U.S.  Over the years, the EPA has proposed and/or enacted a portfolio of regulations that have significant impacts on coal plants.  The federal regulations impacting U.S. coal plants include: (i) Mercury and Air Toxics Standards (MATS); (ii) Effluent Limitation Guidelines and Standards (ELG); (iii) Cooling Water Intake Structures Rules (CWIS); (iv) National Ambient Air Quality Standards (including the more stringent ozone standards) (NAAQS); (v) Coal Combustion Residuals Rule (CCR); (vi) Cross State Air Pollution Rule (CSAPR); (vii) Carbon New Source Performance Standards (NSPS); (viii) Clean Power Plan (CPP); and (ix) Regional Haze Program (RHP).

Given the array of federal regulations and the growing cost of compliance, many coal plants are simply too expensive to operate.  While the direct impact of each regulation is difficult to gauge, the EIA estimates that MATS caused 54 GW of coal-fired capacity to be retired in 2015 as a result of or in anticipation of the 2016 compliance deadline. The EIA also estimates that, depending on how the program is implemented, the CAA will force the retirement of between 50 and 61 GW of coal-fired capacity between 2015 and 2040.  While some of the coal plants that have been retired or are slated for future retirement are small or older plants that are simply uneconomic to run regardless of the level of regulation, there is no denying that the growing list of federal regulations is making coal-fired generation an expensive and risky investment.

Hence, while cheap natural gas may have caused the demand for thermal coal to collapse, federal regulation has kept coal demand pinned down with little chance of letting it up.  But that doesn’t mean that the coal industry is going away.  Peabody and Arch are continuing to operate and will likely emerge from bankruptcy to operate their mines well into the future.  With coal plants still accounting for 32% of total energy production in the U.S., coal will continue to play an important role in the U.S. energy fuel mix.  Despite slowed growth, global markets will provide continued demand for coal as China, India, and emerging markets like Africa continue to build coal plants to fuel their economic development.  Finally, technological breakthroughs, like the developments in hydraulic fracking that gave rise to the shale gas revolution, may allow clean coal technologies to become more cost effective and give coal-fired generation new life.

Down But Not Out.

After fueling the industrial revolution and powering economic growth in the U.S. for much of the past century, thermal coal’s role in the US energy fuel mix is indeed dropping and it appears that the trend will continue, forced down by cheap natural gas and federal regulation.  But while coal may be down, it is not out.  Coal will continue to play an important role in U.S. energy production for years to come.