King Coal is hurting. NYMEX Central Appalachian Coal prices have fallen 18 percent so far this year from $68.67/ short ton (ST) on January 3, 2012 to $57.23/ST on Monday (July 16, 2012). Coal consumption is down and coal company profits are hurting. Patriot Coal filed for bankruptcy last Monday. On top of these woes, new environmental regulations look set to pull the rug from under new coal power plant construction. Today we ask what the future holds for the US coal industry.
United States coal consumption is falling. Over 90 percent of the coal consumed in the U.S. is used to generate electricity. According to the Energy Information Administration (EIA) power-sector coal consumption fell from 975 million short tons (MMst) in 2010 to 929 MMst in 2011. The July 2012 EIA short term energy outlook forecasts that coal consumption for 2012 will fall to less than 800 MMst . Coal production for the first five months of 2012 was 6 percent below last year's level for the same period and EIA predicts an overall fall in production of 9 percent for 2012. Despite lower production EIA forecasts secondary stocks (at power generation facilities) to be close to record levels by the end of 2012 and to remain at those levels during 2013 (see chart below).
The main reason for lower coal consumption this year is lower natural gas prices leading to coal power generation switching to gas. We discussed that phenomena in several recent blogs (see A Hunk a Hunk of Burning Gas – Will Natural Gas Power Demand Keep The Lid on Storage?, Talking Bout My Generation – Coal to Gas Switching – Part I, and Part II). We concluded that generation switching from coal to natural gas is largely dependent on the fuel cost of natural gas CCGT generation remaining significantly below the fuel cost of equivalent coal steam generation. That was true during the second quarter of 2012 when natural gas plant fuel costs stayed at least $3/MWH below typical coal plant fuel costs. EIA reported in July that during April 2012 natural gas and coal were each used for an equal 32 percent of total US power generation for the first time ever and representing a dramatic shift from the previous April when coal was used for 41 percent of generation versus 23 percent for gas. During the first quarter 2012 both coal and gas consumption suffered when a milder than usual winter reduced demand for heating.
As a consequence of lower consumption and falling coal prices (see price chart below), coal company profits are hurting bad. Last Monday (July 9, 2012) Patriot Coal Corp filed for Chapter 11 bankruptcy. The second largest US coal company, Arch Coal saw first quarter 2012 profits plummet on “weaker than expected coal demand and high operating costs”. Consol Energy 2012Q1 earnings slumped 49 percent as a result of lower demand for coal and lower prices for natural gas. Consol idled two Appalachian coal-mining operations this year. Higher coal exports appeared to be the only bright spot for the industry.
Coal mined in the Appalachian region was a particular source of balance sheet woes for coal companies during the first quarter. Despite falling absolute prices over the last year, the cost of Appalachian coal remained relatively high compared to coal from competing mining regions in the west. There are three reasons for this. First Appalachian coal burn quality is high compared to “newer” lighter coal deposits such as those in the Wyoming Powder River Basin (PRB) and second it is located closer to the population centers that consume power and both these attributes lead to a price premium. Third Appalachian coal is more expensive to mine because it lays deeper underground. As a result, relatively high prices have made Appalachian coal less competitive against natural gas and led companies like Patriot into difficulties because of an over dependence on Appalachian mines that couldn’t recover their costs from lower coal prices.
Having said that, things were not a great deal better out west in the Wyoming PRB. Prices at the mine head for PRB coal this year fell below $10/ST – less than 20 percent of the price of Appalachian coal. PRB coal is extracted mechanically in huge open cast mines at low cost. That should make this coal very competitive against natural gas. Unfortunately the transport cost to population centers for PRB coal can be several times the cost of the coal itself. You also need to burn twice the quantity of the lighter quality PRB coal to generate the same power as Appalachian coal - adding to the transport burden. [Interestingly that high transport cost is because diesel fuel trains are used to haul most PRB coal to generation plants in the Midwest and Eastern US. Diesel fuel prices have become more expensive because of increased regulation of that fuel’s sulfur content (see Don’t Let The Sun Go Down On Me – East Coast Refining Part II)]. As a result, although PRB coal can compete with natural gas on a generation fuel cost basis in regions closer to Wyoming such as the Midwest, this “cheaper” coal is too expensive to transport to farther eastern markets economically.
As if price and competition woes weren’t enough, coal is up against the regulator’s wall for a litany of emission sins. Since 1990, various amendments to the Federal Clean Air Act have imposed increasingly tighter regulation on emissions affecting air quality in the US. The coal generation industry has been a particular target of these regulations. The acid rain reduction programs started in 1995 successfully reduced emissions of sulfur dioxide and nitrogen oxide from coal power plants using a “cap and trade” system of tradable emission offset allowances with financial penalties for non-compliance. More recently (December 2011) the Environmental Protection Agency (EPA) has imposed stricter Mercury and Air Toxics standards that limit mercury acid gasses and other toxics from coal and oil fired generation plants. On March 27, 2012, EPA proposed a Carbon Pollution Standard for New Power Plants that would, for the first time, set national limits on the amount of carbon pollution that power plants can emit. The proposed rule applies only to new fossil-fuel-fired electric utility generating units. New natural gas CCGT power plant units should be able to meet the proposed standard without add‐on controls. New power plants that use coal would be required to incorporate technology to reduce carbon dioxide emissions to meet the standard, such as carbon capture and storage.
This new threat of carbon emissions legislation is effectively a death toll to building new coal generation plants if – as seems likely, the cost of building such units is prohibitive versus a cleaner burning CCGT gas fired plant. New nuclear power plant plans are having a tough time getting any public support after the Fukushima disaster last year. That is going to mean a large number of natural gas CCGT units being built and coming onto the market in the coming years to replace aging coal plants as they are decommissioned. In yesterday’s blog (see Export Boom or Import Echo – Do US LNG Export Schemes Make Sense?) we expressed credulity that the natural gas market could supply 14 proposed LNG gas export terminals opening up and exporting 18 Bcf/d of natural gas within 5 years. If the current coal generation capacity all switched to natural gas, the required additional gas burn would be at least 25 Bcf/d. That’s the amount of gas EIA says the US will burn for power generation in 2012 when coal and gas generation reached parity for the first time so we are assuming 25 Bcf/d of additional gas or a total 50 Bcf/d gas burn would cover the gap left by coal. Like the 14 LNG export terminals, just thinking about the idea gives you a headache. It is not going to happen.
At the very least this carbon legislation will have to be slowed down or the necessary power plant carbon capture technology subsidized. If nuclear power is not an option to fill the coal void then there are no obvious alternatives. Renewable wind and solar power may have a role in US power generation but the large footprint of their current technology makes them an impractical replacement for coal generation.
King coal is certainly up against the ropes today and looks to be in for a tough ride over the next few years. However although Prince natural gas is a growing youth with a great deal of potential, he is not ready to take on the full weight of US generation capacity yet. That means some coal generation will survive and the mining industry will have to adjust to a new role of equal or lesser status alongside natural gas when it comes to generation. If the legislators can’t manage to navigate such a balance between environmental regulation and common sense, the consequence will be far higher energy prices for all.
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