Trump May Not be Able to Save U.S. Coal

Donald Trump's election has thrown an apparent lifeline to beleaguered coal producers but he may not be able to do much to revive the fortunes of the industry.

The U.S. coal industry has been a victim of the shale revolution and the enormous quantities of cheap gas that have been unleashed by hydraulic fracturing and horizontal drilling.

There is not much a future Trump administration can do to protect coal producers, who have mostly been the victim of economic forces rather than politics and the Obama administration's "war on coal".

U.S. coal production has fallen by almost a quarter from 1,171 million short tons in 2008 to just 897 million short tons in 2015, according to the U.S. Energy Information Administration.

Electricity produced from coal declined by nearly 32 percent between 2008 and 2015 and coal's share of total power generation has sunk from almost 50 percent to just one-third.

Record warmth during the winter of 2015/16 cut coal consumption even further and proved the final straw for many mining companies ("U.S. coal industry hopes for respite after perfect storm", Reuters, Oct. 18 ).

Coal consumption by power producers during the winter of 2015/16 fell by another 20 percent compared with the winter of 2014/15.

Many coal mining companies were forced to seek protection from the bankruptcy courts during 2015 and 2016 as they tried to reorganise their businesses and negotiate with creditors.

OBAMA'S WAR ON COAL
Coal companies have long complained that they have been disadvantaged by what they perceive as the Obama administration's war on coal to achieve its climate objectives.

The administration has made no secret of its preference for cleaner burning natural gas and renewables like wind and solar.

Emissions regulations for new and existing power plants for greenhouse gases and toxic air pollutants including mercury have been tightened in ways that favour electricity production from gas.

Regulatory permitting and mineral leasing policies have also been reviewed and altered to make coal production much more difficult and expensive.

The Clinton campaign made clear it would continue and intensify these policies because "we've got to move away from coal and all the other fossil fuels".

The Clinton campaign was dogged by the candidate's comment back in March 2016 that "we're going to put a lot of coal miners and companies out of business".

The comment was actually made in the context of a discussion about how to help miners but it cemented perceptions that Clinton was hostile to coal interests ("Clinton's comments about coal jobs", Politifact, May 2016).

INTER-FUEL COMPETITION
Domestic gas production and electricity generation from gas have surged and seized markets from the coal industry.

Inter-fuel competition is nothing new and has adversely affected the coal industry before ("Energy policy in America since 1945", Vietor, 1984).

Coal was hit during the 1950s and 1960s by cheap oil and gas which displaced much of the former use of coal in home heating and power generation.

"By 1956, coal was a sick industry in more ways than one. Coal production had declined by 39 percent from its peak in 1947; three thousand mines had closed and the number of mine workers fell by nearly half. Coal's share of the energy market had fallen by 18 percent with no end in sight", according to Vietor.

"The coal industry was losing share to imported residual oil in the electric utility market; to natural gas in commercial, industrial and residential markets; and to diesel fuel in its railroad and shipping markets."

Coal miners were eventually saved by the energy crisis of the 1970s, which made both gas and oil much more expensive and shifted the power generation mix back to coal.

But now the coal industry is being pummelled once again by the enormous quantity of cheap natural gas which has been unlocked by the shale revolution.

SUPERIOR GAS OPERATION
Gas-fired power plants are cheaper and faster to build, more efficient to run, and offer important operational flexibility which coal-fired power plants cannot match.

A combined-cycle gas-fired plant can be started up in around 15 minutes and reach full power output within somewhere between 40 minutes and 5 hours depending on whether it is started from hot, warm or cold.

By a contrast, a coal plant takes anywhere from 1.5 to 7.0 hours to start up and from 2 to 12 hours to reach full output ("Technical assessment of the operation of coal and gas fired plants", Parsons Brinckerhoff, 2014).

Starting a coal-fired power plant is a lengthy and expensive process which consumes enormous quantities of coal and lighting-up oil as well as electricity from the grid before it generates any usable electricity.

Coal's only advantage as a fuel has been its relative cheapness compared with alternatives such as natural gas or distillate fuel oil.

But as a result of the shale revolution, the cost of gas has fallen close to parity with coal on an energy-equivalent basis, according to the U.S. Energy Information Administration (http://tmsnrt.rs/2fF8tqr).

Even that understates the competitive threat given the superior operational efficiency and flexibility of modern combined-cycle plants.

COAL TO GAS TRANSITION
Power producers are retiring older, less efficient and less flexible coal-fired plants built between the 1950s and 1970s and replacing them with more efficient and more flexible gas-fired units.

The average capacity-weighted coal-fired power plant in the United States dates from 1974 while the average gas-fired plant was built in about 2002 ("Age of electric power generators varies widely", EIA, 2011).

The shift from coal to gas began long before the Obama administration. Since the early 1990s, almost no new coal-fired power plants have been built, and most new units have been designed to burn gas.

As coal units built in the 1960s and 1970s reach the end of their design lives, the alternative is between expensive refits and upgrades or retiring them and replacing them with more profitable gas units.

Given the low cost of gas, it is not surprising plant operators are rapidly switching their fleet away from coal to gas (http://tmsnrt.rs/2g16xuY).

For much of the post-1945 period, growing electricity demand ameliorated inter-fuel competition and helped accommodate increasing consumption of both coal and gas.

But in the past decade there has been almost zero growth in electricity demand, ensuring gas could only grow at the direct expense of coal (http://tmsnrt.rs/2fhgq6D).

HOLDING BACK THE TIDE
Trump has promised to ease the regulatory burden on all fossil fuel producers, including coal, gas and oil and unlock more investment in domestic energy production.

Regulatory changes could help coal producers at the margin. But if they also help natural gas producers and keep gas prices low, they will actually intensify the inter-fuel competition.

Only a large and sustained rise in gas prices would help coal miners, and even then it would probably slow the rate of retirements rather than lead to new coal-fired power plants being built.

Coal-fired plants take up to 4 years to build and have an expected life of around 40 years so anyone constructing a new plant must take a very long-term view about energy policy.

The Trump administration will last for either 4 or 8 years and there is no guarantee the following administration would be as friendly towards coal.

The balance of costs and risks will therefore continue to favour the construction of gas-fired power plants over coal-fired ones, which will keep the industry under pressure.

There may be an option to increase the amount of thermal coal exported to power producers in emerging markets including India and China.

Exporting to Asia might help coal companies in Wyoming but is less likely to help mines in the eastern United States.

But U.S. coal would be competing with rival producers in Colombia, Indonesia, South Africa and Australia as well as domestic production in India and China.

President-elect Donald Trump can help the U.S. coal mining industry at the margin, but he probably cannot save it, unless gas prices rise significantly.

By John Kemp