13 April 2016

Coal Industry In Trouble

This week, the nation's largest coal company, which is also the world's largest private sector coal company (Peabody Energy) has filed for bankruptcy under Chapter 11 (see also here). "Arch Coal (ACI), which owns the second-largest U.S. coal reserves behind Peabody, filed for bankruptcy in January." Coal mining companies, Walter Energy (WLT), Alpha Natural Resources (ANR) and Patriot Coal, all filed for bankruptcy in 2015.

The coal mining industry has been shrinking and consolidating, with smaller producers also floundering. Even these bankrupt companies only lasted as long as they did with artificially subsidized federal coal leases and an ability to ignore the externalities created by the pollution and injuries that the industry creates.
After years of coal plant closures, lost coal jobs, and the rise of cleaner forms of electricity like natural gas, Interior Secretary Sally Jewell announced on Friday [in mid-January of 2016] that the government has put a freeze on issuing new leases for coal mining on public lands. During the moratorium, the government plans to review how the coal mining leases are awarded and could potentially make the leases more expensive for coal mining companies. More expensive leases would both help offset the environmental damage from coal mining and power production and also bring in more royalties for the government.

The announcement is a yet another major blow to the U.S. coal industry. While coal will continue to provide the U.S. with power for many decades, it’s era as the dominant power source could be waning. 
The federal government manages leases for coal mining on 570 million acres of land, and a big portion of that is in Wyoming. About 40% of U.S. coal production comes from federal land. 
A Government Accountability Office report in 2014 found that the federal government was missing out on $1 billion annually because of undervalued coal leases for big coal companies. For years, environmentalists have complained about these outdated leasing policies that were created decades ago. . . . 
Meanwhile, over the summer the 200th coal power plant in the U.S. was in the process of shutting down over the past several years. A study last year found that the coal industry contracted by 50,000 jobs over the past five years.
Last year, it cost Peabody Energy $7.6 billion to produce $5.6 billion dollars worth of coal as coal prices tumbled. Its profit margin on its sales is roughly negative 35%.
Peabody reported a loss of $2 billion last year. Revenue tumbled 17% to $5.6 billion as the average price and amount of coal that it sold fell. It warned of further declines this year due to reduced use of coal by U.S. utilities, along with lower demand from overseas markets. Shares of Peabody (BTU) have already plunged more than 75% this year to trade near $2. The company has roughly 7,600 employees.
Coal has lost market shares to far less polluting natural gas (which fracking has made cheaper and more available) and renewable energy sources:"Over the last 5 years, the price of new wind power in the US has dropped 58% and the price of new solar power has dropped 78%. . . . Utility-scale solar in the West and Southwest is now at times cheaper than new natural gas plants." On two days last year, Colorado's Xcel Energy utility generated a majority of its electricity with wind.
Xcel officials say they already produce 25 percent of their electricity from renewable sources. The recent record wind power surges, where 67 percent and 54 percent of electricity came from wind, happened on windy days when electricity use by residents was relatively low. 
Overall, Colorado utilities on average produce 14 percent of electricity from wind turbines, ranking the state among national leaders. Iowa leads at 31 percent.
For Colorado, at least, the renewable energy industry is also a major source of jobs.  There are 4,700 people in the state employed manufacturing wind turbines, and far more who are employed installing solar energy upgrades for homes and businesses, upgrading the power grid to integrate new renewable energy producers and to maintain wind and solar power generation equipment.  While Colorado is a coal producing state, 19th century court precedents on the rights of mineral owners v. surface owners largely limits Colorado coal production to high quality (least polluting) underground mined coal in relatively small volumes relative to Wyoming and West Virginia.  Colorado employs more people in the renewable energy industry than it does in coal mining.

Most electricity in Colorado is still produced by coal.  Solar power accounts for less than 2% of Colorado electricity generation, but solar power generation costs have plummeted in the last few years. "Coal still powers about a third of the U.S. electrical grid, despite the rapid succession of bankruptcies."

U.S. export sales of coal have collapsed as China's economy has floundered.  And, while oil and gas prices are expected to rebound sooner or later, analysts expect current low prices for coal to be more or less permanent.

Generally speaking, the decline in coal usage has been a good thing.

Coal based power entails not just massive amounts of air pollution relative to natural gas, renewables or nuclear power, but also highly toxic groundwater and surface pollution (coal tailings have significant levels of both toxic and radioactive chemicals making its waste dangerous to a degree comparable to nuclear waste).  Most coal, particularly in coal mining centers in Wyoming and West Virginia, is produced via strip mining, which is one of the most environmentally destructive activities known to man.

Coal production involves high levels of worker injuries in mining it per amount of energy generated, and significant numbers of transportation injuries in getting it from mines to power plants (most often via train or barge), relative to the alternatives like natural gas, renewables or nuclear power.

While nuclear power per volume of fuel mined isn't particularly environmentally friendly relative to coal, nuclear power produces so much more energy per volume of fuel that it doesn't have to be in order to be much more environmentally friendly (and nuclear power generates essentially no air pollution). "One train car full of uranium hold energy equivalent to 3,166,667 train cars of coal."

Coal is used almost exclusively for electric power generation in the United States (and is still the leading source of electric power in the United States), mostly because it is too unwieldy to use for transportation, and because it highly polluting, and therefore requires expensive environmental controls.  The lack of a demand for coal for any other purpose has kept coal prices low.

Initiatives to convert coal to more manageable and environmentally friendly synthetic liquid and gas phase fuels have floundered in the face of low oil and gas prices, which are driven in part by fracking, in part by higher levels of production in the Middle East, and in part by weak economic conditions in China and Europe.


Dave Barnes said...

You need to be careful when looking at the numbers for Peabody.
Some of the problems are from the falling prices for metallurgical coal and not thermal coal.
Does not invalidate the primary thesis of: [thermal] coal is dead.

andrew said...

Good point.

I've known about metallurgical coal (which is the primary ingredient used to change iron into steel) for a long time from studying iron age and Bronze Age metallurgy in Europe. But, I'd never thought deeply about the fact that there is still a market for it in steel production today (perhaps because the U.S. Steel industry was in the U.S. coal industry's shoes back in the 1970s, which I've studied in great detail as a case study in my managerial accounting course as an undergraduate).

Falling prices for met coal are probably temporary and driven by decreased economic activity in China and Europe (although India is ramping up its economy to pick up some slack from China), unlike thermal coal for which the long term prospects are bleak (at least until synthetic hydrocarbon gases and liquids from coal take off when oil and gas prices recover).