Can exports save the US coal industry?

Many coal country residents voted Donald Trump for president in part because he promised to end President Obama’s “War on Coal.” These voters largely remain committed to the president. And why not?

One of the earliest energy policy actions of the Trump administration was an executive order widely expected to dismantle the Obama Clean Power Plan. Obama’s plan would have placed grievous CO2 emission restrictions on U.S. coal power plants.

{mosads}Then the president announced the U.S. withdrawal from the Paris Climate Agreement, which would have further handicapped coal. Since then, federal agencies have been busy scrubbing regulations that made mining more difficult or expensive.

No wonder there were “Hoorahs!” in coal country when the Energy Information Agency released 2017 results showing U.S. coal production increased more than 6 percent year-over-year, the largest increase since 2001.

However, domestic coal consumption actually declined slightly from 2016 to 2017, though the decrease was more than offset by demand for U.S. coal overseas, including in Europe where the criticism of Trump’s decision on the Paris agreement was loudest. The irony was not missed by Trump’s supporters.

Not surprisingly, the increased overseas demand for U.S. coal resulted in increased coal prices, more miners employed, a jump in coal tax revenues for state governments, and a cautious optimism among coal producers. But it may be useful to temper the optimism with some perspective and context.

First, while 2017 U.S. production of 773 million tons was 45 million tons higher than 2016, U.S. coal production peaked in 2008 at nearly 1.2 billion tons. Coal production is actually 34 percent lower than it was a decade ago. The decline cost thousands of mining jobs and led to bankruptcy for some the nation’s largest coal producers.

Second, while the boost in coal production from the export market is welcome, exports accounted for only about 12 percent of 2017 production. The remainder of U.S. coal production is consumed domestically, with roughly 90 percent used to generate electricity.

And therein lies a problem.

Coal’s most important customers use about 40 percent less coal today than they did a decade ago — nearly 400 million tons less. And coal’s market share for power plant fuel shrunk from slightly more than 50 percent to 30 percent, the lowest on record according to the EIA.

Coal’s shrinking importance in domestic power generation stems from several factors emerging over the past decade, including:

• the rapid technology-driven expansion of low-priced natural gas supplies;
• slow or negative electricity demand driven by advances in efficiency and lower economic growth;
• rising use of wind and solar energy for generation made possible through falling costs, generous federal and state subsidies, and market share mandates for renewable energy imposed on power generators at the state level;
• stringent new emissions limits on air toxics and mercury; and
• the decline in societal acceptability of coal because of its perceived role in climate change.

EIA reports nearly half of the utility-scale U.S. power plant retirements over the past decade were fueled by coal. And many of the planned retirements for the next several years are coal-fired. Given these substantial headwinds, the recent uptick in demand for U.S. coal in what is called the “seaborne trade” has been encouraging for coal producers.

While the U.S. is one of the world’s largest producers of coal and historically has been a supplier to international markets, we are a relatively small part (40 million to 125 million tons, depending on the year) of the approximately 1.4 billion metric tons of coal moving in the seaborne trade.

Because of generally higher cost-structure, U.S. producers tend to be swing suppliers, filling supply disruption gaps from larger exporters such as Australia. In fact, a major contributor to the estimated 58 percent increase in U.S. exports in 2017 were opportunist sales to Asia replacing Australian shipments disrupted by Cyclone Debbie last spring.

Supply disruptions frequently spike prices. But these prices historically have been ephemeral. Past spikes tempted many coal producers to expand, but later lead to bankruptcy as supply disruptions were corrected. So far this time, coal producers largely have resisted adding capacity, instead meeting demand by running existing mines harder.

In the near term, overseas demand for U.S. coal — particularly the metallurgical coal used in steel-making — should help stabilize the domestic coal industry. Most future growth is expected to be in India, Pakistan, China and other parts of Asia. The world’s largest coal exporters — Australia, Indonesia and Russia — have advantages, including proximity to the customers, that likely will put an upper limit on U.S. coal exports.

For the next few decades, then, the fate of the U.S. coal industry will be tied to domestic power generation. State and federal policymakers will have opportunities to affect coal’s future. The United States has enormous coal reserves, which potentially add to our strategic, geopolitical advantage in energy. Simply abandoning coal, or “Leave it in the Ground,” as environmental groups like to say, seems short-sighted.

First and foremost, policymakers should help stabilize the domestic industry by reviewing mining regulations to ensure they are effective and fair, and that the permitting process is efficient and streamlined.

Second, we must solve the carbon problem. Regardless of one’s views on climate change and the role played by carbon emissions, societal views on emissions already have influenced many power generators to abandon their coal plants. DOE’s recent announcement of $44 million of investment in carbon capture technology projects — as well as the announced collaboration of the NETL and Oak Ridge National Laboratory to explore research for making coal plants more efficient and lower emitting — are promising steps.

Finally, level the playing field for coal. Renewable energy sources, particularly wind and solar, have enjoyed decades of subsidies and tax credits, as well as a decade of preferential treatment from state regulators. Much has changed since state Renewable Portfolio Standards were widely adopted. Fears of energy shortages have faded, and newer alternative energy sources are no longer in their infancy. It may be time to give power generators more flexibility to develop fueling strategies for power generation based on economics, grid reliability and fuel diversity.

Thomas F. Hoffman is a communications consultant specializing in energy issues. His energy career spans nearly 45 years, primarily in the coal industry, including more than 35 years with CONSOL Energy, where he was senior vice president-external affairs.