Regulatory relief didn’t help coal industry in 2017 and can’t save it in 2018

If you want to understand the future of the U.S. coal-mining industry, it’s best to start with the growing number of coal-fired electric generating plants that are closing — and then consider why this trend is gaining pace.

Since generating plants come in many sizes, the best measure of them is by total amount of generating capacity in megawatts (MW) of all the plants closed. In 2017, almost 7,300 MW of coal-fired generation were retired and more than 16,000 MW of new, future retirements were announced.

This year, 15,000 MW of coal-fired electricity generation will be retired — double the 2017 total. That’s one of the conclusions in a report my group, the Institute for Energy Economics and Financial Analysis, published today, “U.S. Coal: More Market Erosion is on the Way”.

{mosads}So why are all these plants being shut down? Because they can’t compete with market forces.

Our report shows that use of coal to generate electricity declined in 2017, as it has been doing for years. And we see the decline continuing this year. 

Coal’s main competition is natural gas. But even though natural gas prices increased by 20 percent in 2017 and its portion of the electricity generation market declined slightly, coal in 2017 could not take advantage of the moment and actually lost market share. This year, natural gas prices, still low even with recent increases, are expected to decline and to stay low for the foreseeable future. One upshot of cheap more low-cost gas-burning generating plants are being built.

On the fast-moving renewable energy front, market share for wind and solar has increased four-fold since 2009, and in four states — Iowa (37 percent), Kansas (36 percent), Oklahoma (32 percent), and South Dakota (30 percent) — wind’s share of total electricity generation exceeded 30 percent in 2017. 

Utilities in the middle of the country, where many coal-fired generating plants are located, are rapidly increasing their investments in wind, which — like solar — now provides lower-cost electricity during times of peak demand, when prices are highest, thus depriving coal-burning plants of badly needed revenue. 

Meanwhile, demand for electricity is barely growing, even as the economy expands, another indication that natural gas and renewables will continue to take market share from coal.

U.S. coal producer get 90 percent of their business from U.S. electricity-generation markets, which means domestic customers are the key to these producers’ future. As we detail also in our report, every-time a coal-fired plant closes, a coal-mining company loses a customer. That’s why employment in coal mining remained relatively flat in 2017 and is likely to stay that way.

Nonetheless, claims of a turnaround in the coal industry persist. Granted, some gains were notched in in 2017 as companies that emerged from bankruptcy with reduced debt saw their stock prices increase. But those will be short-lived gains.

If there were in fact good prospects for a coal recovery, there would be a robust market for coal assets (mines and such). There isn’t. Deals all across the U.S. coal industry were plagued with problems in 2017. Parties could not obtain financing in some cases. Sellers paid buyers to take assets took losses on their books when they simply gave away coal assets just to get rid of them.

Another sign of where the coal industry is going is in its ability — of lack thereof — to attract long-term investors. Pulling in short-term, quick-buck investors is not an indication of good health.

Nor is the absence of true regulatory relief. Recent rollbacks of federal environmental policies on coal mining and electricity production and the reversal of reforms to the federal coal-leasing program proved largely ineffective in improving the balance sheets of coal producers in 2017. We see competitive market forces continuing to have more impact on coal producers then any change in regulations.

The coal producing industry shrank in 2017, and it will shrink further in 2018.

Tom Sanzillo is director of finance for the Institute for Energy Economics and Financial Analysis. David Schlissel is director of resource planning development. Seth Feaster is an IEEFA energy data analyst.