The Coal Industry is facing dual challenges -- firstly, rising competition from natural gas and alternate energy as a substitute energy source and secondly, regulatory rulings to lower emission which will inevitably lead to a curtailment of coal power generation.
In Aug 2015, the new Clean Power Plan was unveiled, which calls for CO2 reductions of 28% by 2025 and 32% by 2030, from 2005 levels. This is slightly stricter than the draft proposal wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030.
In response to the anti-carbon drive, utility operators are shutting down coal-based power plants and are directing fresh investments toward constructing natural gas facilities and adding more renewables.
A recent release from Peabody Energy (BTU - Analyst Report) indicates that utility coal demand will decline by nearly 100 million tons in 2015, primarily due to lower natural gas prices, while U.S. coal shipments are projected to decline 90 million tons in 2015 from 2014 levels.The coal major expects demand to deteriorate further in 2016.
A release from the U.S. Chamber of Commerce also has a bearish stance on thermal coal, going forward. The report quoted that over the 2011 to 2030 time frame, more than 150 gigawatts (GW) of power plants will be taken out of production and more than 50% will be coal-fired units. The release also predicts nearly 360 GW to be added from 2011 through 2030, with the majority of units using natural gas, wind and solar photovoltaics (PV) to generate electricity.
Arch Coal Inc. (ACI - Analyst Report) echoes a similar sentiment. The company believes that natural gas prices and the likely implementation of new environmental regulations this year could actually lower domestic demand for thermal coal by 95 million tons in 2015.
Per a release from U.S. Energy Information Administration (EIA), lower domestic coal consumption and reduced exports will result in an 89 million short ton (MMst) decline in U.S. coal production in 2015. The report also indicates that U.S. coal production will decrease by 28 MMst (3.0%) in 2016. The annual average coal price sold to the electric power sector averaged $2.36/MMBtu in 2014. The EIA expects the delivered coal price to average $2.25/MMBtu in 2015.
Here are some of the severe headwinds that the coal industry is up against:
Environmental Legislations: Coal has been losing its importance as a fuel source over the last few years, particularly in the U.S., vis-à-vis other sources that are much less harmful to the environment. Concerns over the emission of greenhouse gases and global climate change have resulted in the formulation of new legislations and policies which emphasize the use of environment friendly fuel sources, particularly in the power sector.
This has considerably slowed the expansion of coal-fired capacity in the power sector, with utility companies now building new natural gas-fired plants and resorting to alternative sources of energy generation like wind, solar and hydro power.
The final version of the Clean Power Plan will ensure that coal consumption for power production in the U.S. will go down from the present level, unless the utilities pour more money to upgrade existing plants.
Florida Power & Light Company (“FPL”), a unit of NextEra Energy Inc. (NEE - Analyst Report), filed a petition with the Florida Public Service Commission requesting for the approval to acquire Cedar Bay Generating Plant in Jacksonville. FPL had a long-term power purchase agreement with the owner of this 250 MW coal-based facility. The objective of the request was to acquire the plant and gradually phase it out of operations.
Xcel Energy Inc. (XEL - Analyst Report) has already reduced carbon dioxide emissions during power generation by around 22% since 2005 and American Electric Power Co., Inc. (AEP - Analyst Report) has eliminated over 5,500 megawatt (MW) of coal-fired capacity.
Natural Gas Substituting Coal: A major substitute for coal in energy generation is another fossil fuel –natural gas. Coal is being dumped in favor of natural gas, which due to extensive exploration and production and a shale gas boom in onshore U.S., is seeing significantly lower prices than in the past.
Natural gas is usually an attractive choice for new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. This trend is encouraging power generators to not only convert their existing plants to gas-fired ones but to build new units.
Electric generation through gas-fired plants is likely to become more competitive over the coming years given its abundant domestic availability and the regulatory threat hanging over the coal mining industry. A recent EIA report projects an 8% decline in coal consumption in the electric power sector in 2015.
The EIA release also confirms that sustained low natural gas prices have favored natural gas generation this year. This has led to lower usage of coal for power generation and a significant increase in the natural gas share of total generation from 27.4% in 2014 to 31.6% this year, while coal’s share declined from 38.7% to 35%.
Competition from Alternative Energy Sources: Apart from natural gas, the coal industry has been losing a major share of its electric generation demand to renewable sources of energy.
The EIA report reveals that electricity generation from renewable sources is projected to increase to 18% by 2040 in the U.S. with renewables accounting for 9.8% of total power consumption in 2014. Production of power from renewable sources is supported by most of the U.S. states though there is no national consensus regarding the percentage of renewables in the total energy mix. However, the Clean Power Plan will encourage energy conservation and efficiency plans, use of renewables and clean alternative technologies for lowering air pollution.
At present, 30 U.S. states and the state of Columbia have enforceable renewable portfolio standards or other renewable generation policies. These policies were designed to spread awareness and encourage the power generators to produce more from renewable sources.
Per the EIA’s latest reports, nearly 18 GW of wind generated capacity will come online in the U.S. in the 2014 to 2016 time frame, while new solar generation for the same period will be 9 GW. Hydro power generation is also expected to improve from present levels.
The concept of community solar gardens is also gradually gaining traction in the country. These gardens are generation facilities located in or near a community served by a qualifying retail utility. SolarCity Corporation (SCTY - Snapshot Report) along with Minnesota-based solar developer Sunrise Energy Ventures announced plans to develop a series of up to 100 1MW (AC) community solar installations. Utilities like Xcel Energy are increasing their solar garden presence, paving the way for lower electricity bills.
Rising Competition and Stronger Dollar: Besides competition from renewables and natural gas, U.S. coal producers are also affected by rising export from Indonesia and Australia and a stronger dollar, which is making this commodity dearer in the international markets.
The EIA release sums up that weak coal demand, lower international coal prices and a higher output in other coal-exporting countries have led to a decline in U.S. coal exports. It projects coal exports to fall by 20 MMst to 77 MMst in 2015.
To Conclude
In “Coal to Be Sidelined as Fuel Source?” we focused on the conditions which are expected to drive the industry forward.
However, the continuous fall in demand and soft prices have stretched the financial capabilities of the coal miners. Many of these leading companies are being put under the “self-bonding” test. Self-bonding is a government program that allows producers of coal to economically insure their clean-up costs in case of a bankruptcy. While Peabody Energy cleared the self-bonding test, which undoubtedly eases some of the financial stress that was building on this coal company, review results are pending for Arch Coal.
To overcome the difficult times and remain viable, coal producers are idling coal mines, lowering headcount, delaying capital expenditure plans and even resorting to sell their coal mines. Despite all these initiatives, it is going to be a very difficult phase for the coal producers as demand for coal is not going to improve radically any time soon.
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