First a warning, then executive actions through the EPA, now a halt to coal mining leases on federal land
Government policy can be used as a powerful industry killer. Ask the coal miners in Appalachia.
In a 2008 speech candidate Obama warned that “if somebody wants to build a coal power plant it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted.” Many in the business community were shocked that a man who later became president of the United States had essentially declared war on an iconic American industry.
Here’s where things stand with coal production and demand in the eight years following Mr. Obama’s warning. In its 2015 review, the EIA summed up the U.S. coal industry as follows:
“Since reaching a high point in 2008, coal production in the United States has continued to decline. U.S. coal production in 2015 is expected to be about 900 million short tons, 10% lower than in 2014 and the lowest level since 1986. Regionally, production from the Appalachian Basin has fallen the most. Low natural gas prices, lower international coal demand, and environmental regulations have contributed to declining U.S. coal production.
“In the United States, almost all coal is used to generate electricity. Recently, coal’s share of electricity generation has fallen as its market share of natural gas and renewables increased. The average daily natural gas spot price at the Henry Hub, a key natural gas benchmark, fell from $4.38 per million British thermal units (MMBtu) in 2014 to $2.61/MMBtu in 2015, resulting in greater natural gas-fired electricity generation. In April 2015, natural gas-fired electricity generation surpassed that of coal-fired generation on a monthly basis for the first time in history, and it did so again in each of the months from July through at least October, the latest monthly data available. The most recent Short-Term Energy Outlook estimates that 2015 power sector coal consumption will be about 764 MMst, the lowest level since 1988.
“U.S. coal exports also declined in 2015, especially to major coal export destinations such as Europe and China. Although 15.7 MMst of coal was exported to the United Kingdom and Italy in 2014, only about half that volume is expected in 2015, when complete data are available. China, the world’s largest coal consumer, is traditionally a large market for international coal trade, and China imported 8.3 MMst from the United States in 2013, about 7% of total U.S. coal exports that year. In 2014, U.S. coal exports to China decreased to 1.8 MMst, and the 2015 total is expected to be less than 0.5 MMst. Based on U.S. Census Bureau data through September 2015 and estimates for the remainder of the year, EIA expects the United States to export a total of 77 MMst of coal in 2015, a 21% decline from the previous year.”
In a webinar on Jan. 14 entitled “2016 Coal Outlook: Light at the End of the Tunnel or More Pain on the Horizon?” Bloomberg’s coal analysts seemed to confirm the direction of the road that the EIA’s facts were heading down. While their description of the industry was couched in analysts’ idioms and data pulled out of a Bloomberg terminal, when you processed was being said, it felt like a eulogy.
But for coal, the bad news kept coming. The New York Times ran a story on Jan. 15 entitled, “In Climate Move, Obama Halts New Coal Mining Leases on Public Lands.”
“The Obama administration announced on Friday a halt to new coal mining leases on public lands as it considers an overhaul of the program that could lead to increased costs for energy companies and a slowdown in extraction,” the Times story said.
“’Given serious concerns raised about the federal coal program, we’re taking the prudent step to hit pause on approving significant new leases so that decisions about those leases can benefit from the recommendations that come out of the review’, said Interior Secretary Sally Jewell. ‘During this time, companies can continue production activities on the large reserves of recoverable coal they have under lease, and we’ll make accommodations in the event of emergency circumstances to ensure this pause will have no material impact on the nation’s ability to meet its power generation needs’.”
The Times went on to say that today’s action “represents a significant setback for the coal industry, effectively freezing new coal production on federal lands and sending a signal to energy markets that could turn investors away from an already reeling industry.”
In their webinar, the Bloomberg analysts said “the coal story is characterized by the back and forth between government and industry on the carbon question.” They singled out China’s cap-and-trade program, saying it could be the largest such carbon tax on the globe. According to the analysts, every ton of coal you burn emits two tons of carbon dioxide into the atmosphere. They said that China’s cap-and-trade program sports a $10 / ton of CO2 carbon price tag. So $10 per ton of CO2 would make coal $20 per ton more expensive than the market price of the commodity.
They characterized the EPA’s Clean Power Plan as a plan that was designed to lower coal demand by 30% – by the year 2030. When demand for coal shrinks, the need to mine it goes away, leaving coal miners and mining companies holding the bag with nowhere to go; i.e., heavily levered mining companies start to go bankrupt.
This week, Arch Coal, the nation’s second largest coal miner, declared Chapter 11 bankruptcy. This is on the heels of Chapter 11 declarations by Walter Energy Inc., Alpha Natural Resources, and Patriot Coal. Both Bloomberg and the EIA pointed out that the Appalachian producers are at higher risk than the Powder River Basin producers.
Does Coal’s Demise Mean Good Times for Natural Gas?
According to a Zacks article about the coal industry, “The death knell struck for the coal industry when the U.S. Environmental Protection Agency (“EPA”) finalized Mercury and Air Toxics Standards (“MATS”) in 2012 and proposed its Clean Power Plan in Jun 2014. The clean air initiatives aimed at reducing hazardous toxics from the air through the installation of pollution control equipment. The EPA estimates coal consumption in the power sector to decline by 7.4% in 2015 from 2013 levels. The situation has only been made worse by tough competition from clean-burning natural gas. The superior fuel efficiency of combined-cycle natural gas facilities has made this technology even more popular among the utilities.”
Natural gas fired power plants are replacing coal plants at a rapid clip in the U.S. And now, in the wake of a popular climate change movement that effected a global agreement to reduce carbon at the recent United Nations’ climate accord in Paris, coal now has a target on its back in other parts of the world where it was previously lauded as the cheap fuel that would allow the buildout of electricity for large populations without electricity across the developing economies—China and India being two of the largest users. And Bloomberg’s analysts agreed that the coal exports to China would fall and that India, the only bright spot for growth of coal demand, was now in question.
Why are natural gas plants popular?
Natural gas power plants reduce CO2 emissions by approximately 50% compared to coal plants and they have the ability to be fired-up on demand or left on full-time as baseload generation, something that is impossible for wind or solar projects to provide.
One of many local examples of the proliferation of natural gas power plants across the U.S. is a proposed gas fired plant in Doswell, Virginia, that would add 340 MW of capacity to a site near Kings Dominion where the sponsor operates five turbines.
“We think there’s demand in the market for natural gas-fired peaking capacity,” said Tony Hammond, asset manager for Doswell Limited Partnership. “And it’s driven by a lot of market moves such as coal plants retiring, the price of natural gas and consumers’ demand for power.” The turbines are earmarked for peak demand to prevent blackouts on the hottest and coldest days demanding the most electricity.
“Doswell Limited Partnership is controlled by New York-based LS Power, which in 2011 bought the assets from NextEra Energy Resources. Since 2005, LS Power has raised more than $27 billion to build, buy or invest in the electricity industry,” the Richmond Times-Dispatch further reported.
County officials said they support expansion at the site, which has been a boost to the county’s tax base. “We knew they wanted to expand, and we told them we wanted to support them,” Hanover County Administrator Cecil R. Harris said. “They’re a great business, and they meet a community need with providing electricity. We would absolutely support their opportunity to expand.”
A 2014 report called the Virginia Energy Plan found that utilities in the state need an additional 14,000 megawatts of new generating capacity by 2024 to keep up with expected demand growth, the paper reported.
Another much larger gas fired power plant, one of the largest coal-to-natural gas power conversion projects in the U.S., is proposed for Snyder County, Pennsylvania. Hummel Station is a proposed natural gas combined cycle generating facility that will replace the 65-year-old retired Sunbury coal-fired steam electric generating plant, which was permanently shut down in 2014.
When Hummel Station comes online in early 2018, the 1,100+ MW plant will power approximately one million homes in major markets including Philadelphia and New York, decrease emissions of Sulphur dioxide and nitrogen oxide by 90 percent, and require 97% less cooling water than the retired, coal-fired power plant, according to news releases announcing the proposed plant. Contractors say the plant will interconnect to pipelines that bring natural gas from the Marcellus formation. Note: a 1,100 MW power plant is about the same size as a single reactor nuclear plant.
As far as an attractively priced fuel for U.S. power generation, Bloomberg’s analysts said they see natural gas staying below $3/Mcf for the rest of 2016. They said gas prices would have to drop 50 cents to balance the market, and that every 25-cent drop adds 1 Bcf of demand for natural gas per day.
The End of an Era?
The Times said the president telegraphed today’s move to halt coal leases on federal land in this week’s State of the Union address, when he said “I’m going to push to change the way we manage our oil and coal resources so that they better reflect the costs they impose on taxpayers and our planet.”
According to the New York Times story, “the environmental advocacy group 350.org, which led the successful campaign against the construction of the Keystone XL oil pipeline, turned its efforts to pushing Mr. Obama to shut down new leases for coal mining on public lands.
“The administration’s top priority needs to be to keep fossil fuels in the ground,” said Jamie Henn, a spokesman for the group, reported the Times. “Any move that increases the cost of extracting fossil fuels on public land.”
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