Geology and Markets, not EPA, Waging War on Coal
- June 10, 2014
- 168 views
This post written in collaboration with Leslie Glustrom, founder and former Director of Research and Policy at CEA.
With the release of the Environmental Protection Agency’s proposed rules limiting carbon pollution from the nation’s electricity sector, you’ve no doubt been hearing a lot of industry outrage about “Obama’s War on Coal.”
Don’t believe it.
Despite the passionate rhetoric from both sides of the climate divide, the proposed rules are very moderate — almost remedial. The rules grade the states on a curve, giving each a tailored emissions target meant to be attainable without undue hardship. For states that have already taken action to curb greenhouse gasses, and have more reductions in the works, they will be easy to meet. California, Oregon, Washington, and Colorado, are all several steps ahead of the proposed federal requirements — former Colorado Governor Bill Ritter told Colorado Public Radio that he expects the state to meet the proposed federal emissions target for 2030 in 2020, a decade ahead of schedule. This isn’t to say that Colorado has particularly clean power — our state has the 10th most carbon intensive electricity in the country, with about 63% of it coming from coal — but we’ve at least started the work of transitioning.
Furthermore, many heavily coal dependent states that have so far chosen to ignore the imperatives of climate change (e.g. Wyoming, West Virginia, Kentucky) must only attain single-digit percentage reductions, and would be permitted to remain largely coal dependent all the way up to 2030. Roger Pielke Jr. and others have pointed out that in isolation, the new rules would be expected to reduce the amount of coal we burn by only about 15%, relative to 2012 by 2020. By 2030, we might see an 18% reduction in coal use compared to 2012. Especially when you compare these numbers to the 25% reduction in coal use that took place between 2005 and 2012, and the far more aggressive climate goals that even Republicans were advocating for just two presidential elections ago, it becomes hard to paint the regulations as extreme. Instead, they look more like a binding codification of plans that already exist on the ground, and a gentle kick in the pants for regulatory laggards to get on board with at least a very basic level of emissions mitigation.
So, in isolation, there’s a limited amount to get either excited or angry about here. And thankfully, the EPA’s rules will not be operating in isolation!
The Real War on Coal
Even without the threat of carbon regulations, the US coal industry is already in dire straits — due primarily to geology and the steady transformation of our energy markets — not politics and carbon regulations. That 25% decline in coal burning we’ve already seen? That came from flat or declining electricity demand, plummeting costs for long-term renewable energy contracts with guaranteed prices, a glut of cheap fracked gas, and steadily increasing coal production costs which have resulted in steadily increasing delivered coal prices (as we reported in October, 2013) These factors have all worked together to squeeze coal’s profit margins, and send the industry into decline. On top of all that, China’s once insatiable and rapidly growing appetite for imported coal appears to have subsided, much to the dismay of producers who were hoping to garner fatter profits from selling US natural resources overseas. Amidst this backdrop, the widespread realization that carbon pricing and regulation is inevitable is just icing on the cake.
The truth about the US coal industry can be found in their financial statements, publicly available through regulatory filings submitted to the Securities and Exchange Commission (SEC). Their annual 10-K and quarterly 10-Q filings paint a picture of an industry in trouble.
The top 3 US coal companies are in the red:
- Peabody (BTU), the #1 US coal producer, reported a loss from continuing operations in 2013 of $286 million, and an additional loss from discontinued operations of $226 million (Peabody 2013 10-K, page 43). In Q1 of 2014 they reported a loss from continuing operations of $44.3 million.
- Arch Coal Inc. (ACI), the #2 US coal producer, reported a loss of $641 million for 2013 (Arch Coal Inc 2013 10-K, page 57) and $124 million in losses for 2014 Q1.
- Alpha Natural Resources (ANR), the #3 US coal producer, reported over $1 billion in losses for 2013 (Alpha Natural Resources 2013 10-K, page 57) and a net loss of over $55 million for 2014 Q1.
Coal company stocks have plummeted:
The stock prices of all of the top 3 coal producers had already fallen dramatically from their peaks well before the EPA’s draft carbon rules:
- Peabody (BTU) lost 81% of its share value, falling from a peak of $88.69 in June 2008 to $16.16 on Friday May 30, 2014.
- Arch Coal Inc. (ACI) lost 95% of its share value, falling from a peak of $77.40 in June 2008 to $3.56 on Friday May 30, 2014.
- Alpha Natural Resources (ANR) lost 97% of its share value, falling from a peak of $108.73 in June 2008 to a mere $3.88 on Friday May 30, 2014.
US coal production is at its lowest in 20 years
US Coal Production as of 2013Q4, from the US EIA.
It is entirely possible that the US has past its peak coal production, with a maximum of 1.171 billion tons in 2008. In 2013 US coal production fell below 1 billion tons for the first time since 1993.
US coal production costs are steadily rising
Even in the big Wyoming surface mines the amount of overburden (dirt) that needs to be moved to access the coal is steadily increasing and driving up production costs. Instead of making the capital investments needed to mine this coal, the coal companies are slashing their capital expenditure budgets making it unlikely that coal production will be increasing in the near future.
For instance, in Peabody Energy’s 2013 Q3 earnings call CEO Greg Boyce essentially told industry analysts that at current prices and production costs, it wasn’t worth investing additional capital in the PRB to continue or increase production:
[I]n reality, people have not spent capital to replace equipment that ultimately reached the end of its useful life or spent capital to overcome the annual increase in stripping ratio that naturally occurs in the Powder River Basin.
Similarly, Cloud Peak Energy plans to reduce production at their Cordero Rojo mine in Wyoming by more than 25% (about 10 million tons a year) in 2015 due to rising costs of production and declining profit margins (Cloud Peak Energy 2013 10-K, page 59). Cordero Rojo is the 3rd most productive coal mine in the US, producing about 4% of US coal today. Cloud Peak also walked away from a large BLM coal lease which they had applied to have auctioned off, citing cost concerns.
The reserves that never were
As we’ve detailed elsewhere, led by the USGS, many others including the EIA the SEC, and even the coal companies themselves are finally starting to come to terms with the fact that a huge chunk of what we’ve been calling coal reserves are actually economically unattractive resources which are unlikely to be extracted, given the downward price pressures and production cost increases coal is subject to. In this vein, Arch Coal now says that their Black Thunder mine — the nation’s single most productive coal mine, once responsible for about 10% of all US coal — is likely to start playing out by 2020. (Arch Coal Inc 2013 10-K, page 15). There are potential leasing tracts nearby, but with operating margins of just $0.28 per ton in the Powder River Basin, and company-wide losses of more than half a billion dollars a year, will the company really be able to commit the capital required to develop them?
More work to be done
The EPA is not waging a war on coal. This isn’t to say that a war on coal would be a bad idea, but rather that it’s mostly unnecessary. Coal in the US is dying off on its own, and at most what we’re doing is equivalent to taking it off life support. Our task is to manage the graceful transition to a much lower carbon energy system.
The proposed EPA carbon regulations are just the first baby steps we need to take down the path of avoiding catastrophic warming. The EPA, the state legislatures and regulatory bodies, and (someday) the US Congress are all going to have do do a whole lot more work in the years to come, working together to transform our energy system much faster and much more profoundly than these regulations alone can.
Because there’s so much more work to do, it is important that we do not allow the EPA and the Obama administration to be made into scapegoats for the decline of the coal industry. We must not allow this kind of work to remain politically poisonous, or we’ll never build the kind of momentum we need to finish the job.
If instead we can build on this progress, then the US can look forward to a future of stable and declining energy costs, with an economy that is much more resilient against the vagaries of the global commodity markets. Our water will have less mercury in it, and our kids will have less asthma. If we can commit to making this transition at scale, and show that it’s not economically disruptive (unless you happen to be a coal company) then who knows… other nations might even follow suit.