US coal is in deep trouble. “In the short term, the hot summer might increase electricity demand and bring some relief to the coal sector, but the longer-term outlook is down,” said Luke Popovich, vice president of external communications for the National Mining Association (NMA). “It has not been a good year for coal, and the only good thing you can say about it is it cannot get too much worse.”
The list of woes besetting the sector is short, but their cumulative impact is dire. An array of environmental regulations that govern the extraction and use of coal are finally reaching enactment stage. Some mines face closure and many electrical utilities are retiring older coal-fired facilities rather than upgrading equipment. In addition, natural gas prices are near record lows, tempting utilities to switch coal-fired operating facilities to gas-to-power (GTP).
In 2007, the US Supreme Court ruled that the Environmental Protection Agency (EPA) has the authority to control greenhouse gases (GHGs) under the Clean Air Act (CAA). The EPA established a tailoring rule, in which, starting in January, it would impose new emission rules on refineries, coal-fired power plants and other facilities emitting more than 100,000 tpa. Many federal politicians see GHG controls as their responsibility and launched bills to halt the EPA’s imposition of GHG limits under the CAA, but final Senate efforts to stall them failed in June. Stricter emission regulations include the Cross-State Air Pollution Rule (CSAPR), Mercury and Air Toxic Standards (MATS) and Clean Water Act (CWA) provisions limiting once-through cooling and coal ash disposal regulations.1
Plants shutting down
Utilities are auditing their assets and culling the weak. “The total coal-fired fleet in the US is around 300 GW, out of a total energy fleet of 1100 GW,” said Pearce Hammond of consultancy Simmons & Co. “About 50 – 60 GW of the coal-fired plants are reaching retirement age. With environmental regulations getting stricter and gas being so cheap, the utilities are deciding to retire them.”
This is backed up by the Energy Information Administration (EIA). “In its June 2012 outlook, the EIA changed its forecast for capacity knockout in the next few years from 33 GW to 49 GW,” said Popovich. “That huge increase was owing to the inclusion of EPA regulations that had either been upheld by the courts or put into effect.”
If regulations and retirement were not bad enough, coal faces the most severe challenge to its electricity baseload dominance in well over a decade. Geoscientists have long known that the shale formations that lay in abundance through most basins in the world contain large amounts of gas, but that the impermeable nature of the dense, black rocks made it very difficult to produce economically. Starting in the early 2000s, however, explorers in Texas managed to crack the Barnett shale and produce economical volumes of gas. According to the EIA, several other promising plays could push US shale gas production to 16 billion ft3/day (453 million m3/day) within the coming two decades.
The result has been a severe glut as supply far outpaces growth in demand. In 2011, spot prices averaged US$ 4.16/1000 ft3. Working gas storage capacity in the US is estimated to be 4150 billion ft3 (118 billion m3). Thanks to overproduction and a mild winter, by early 2012, gas in storage remained at almost 3500 billion ft3 (1 billion m3); prices dropped to under US$ 3/1000 ft3 in the US and under C$ 2/1000 ft3 in Alberta, Canada.
Power plants took note. “Most switching has been occurring with central Appalachia coal, which has a high Btu and low sulfur, but they have been mining it for a long time and they are now chasing thinner seams, so it is more expensive,” said Hammond. “Even Powder River Basin (PRB) coal, which is much cheaper, cannot compete with natural gas.”
The switch has been made easier by existing infrastructure. The US has about 400 GW of nameplate gas-to-power capacity, half of which is peakload capacity, and half combined cycle. A combined cycle plant uses a turbine to generate electricity, but it also uses the hot exhaust gas to heat water to steam to drive a second turbine. The combined cycle is much more efficient; instead of using 12,000 Btu to make 1 kWh, it only takes 7000 Btu. That, says Hammond, is where gas-to-power is growing. “A few years ago, combined cycles had a utilisation rate of around 35%, and now they are at 50% or more. The existing fleet can run even harder, around 70 – 80%, so there is still room for growth.”
As recently as five years ago, coal’s percentage of electricity generation in the US stood at 49%, with natural gas supplying 19%. In June of this year, the EIA announced that April’s monthly electric power generation from natural gas-fired plants nearly equalled that from coal-fired power plants: each supplied about 32% of total generation during that month. Industry participants now expect 2012 thermal coal production to drop approximately 10%, to around 900 million t.
The precipitous decrease in demand has left major producers scrambling. Arch Coal, one of the top five miners in the US, saw its production drop by over 13% in Q2 2012. It closed four higher-cost thermal coal mining operations and suspended operations at one additional facility, booking a one-time loss for mine closure and impairment costs of US$ 526 million. Other producers were not so fortunate.
Hope for the future
Coal may be down, but it is not out. Utilities, producers and Government are working together to find solutions. Many existing coal-fired facilities can meet regulatory requirements through the installation of the latest pollution control technologies, such as sulfur scrubber and carbon capture and storage (CCS).
International sales will become increasingly important to the US coal sector. “Exports were around 107 million t in 2011,” said Popovich. “We expect to see the same this year.” Although some export markets, such as the EU, have been relatively subdued, demand in Asia remains strong.
US producers are working to increase exports to consuming nations. In 2011, Arch Coal purchased an interest in a bulk commodity terminal on the west coast, in Washington. After dredging and renovations are complete this year, the Millennium Bulk terminal will be able to handle up to 5 million tpa of thermal and metallurgical coal.
But resistance to coal exports is beginning to mount. “There is much more concerted opposition to slow or stop the export of PRB and mid-Atlantic coal,” said Popovich. “Environmentalists are trying to persuade communities to stop the export or creation of terminals. Previously, exports were hardly on the screen, and now they are in the minds of everyone.”
Peabody Energy is directing investment to international mining. It now owns significant deposits in Australia, and has set 2012 seaborne targets of 14 – 15 million t of metallurgical coal, and 12 – 13 million t of thermal coal. Although this represents a fraction of the company’s US production, its international output is set to climb dramatically. “Global industry and economic data continues to support a coal super-cycle, with sustained increases in coal demand from expanding international electricity generation and steel production,” said Gregory Boyce, chairman and CEO of Peabody. “This is primarily driven by urbanisation and industrialisation in China, India and emerging Asia.”
For US coal producers, future prospects can improve, but only with help from other sectors. There is growing alarm among the public over hydraulic fracturing, for instance. Some US states have emplaced moratoriums on hydraulic fracturing until more is known. Should bans become widespread, future gas production would be seriously compromised.
Since the time of writing, the Cross-State Air Pollution Rule has been rejected by the US Court of Appeals and sent back for revision.
Written by Gordon Cope
This article is taken from World Coal September 2012, subscribers can login here to read the full issue.