The Ripon Forum

Volume 48, No. 3

September 2014

The President’s Shortsighted Policy on Coal

By on September 19, 2014

by PHIL FLYNN

Phil FlynnAs the Environmental Protection Agency wages its war on coal, it seems that the U.S. is exporting hypocrisy. With U.S. greenhouse gas emissions plunging due to our abundance of cheap natural gas, the dirty little secret is that coal exports are beginning to boom. While the EPA wants to take credit for closing our coal plants, the truth is that the shale gas revolution, courtesy of the energy industry, has been one of the main factors in reducing carbon emissions.  The EPA may be slowing coal burning in the U.S., but the reality is that our coal will be exported to countries out of the reach of the agency.

According to the U.S. Energy Information Administration, in 2013, U.S. coal mines produced just fewer than one billion short tons of coal — the lowest output level since 1993. They say that more than 90% of this coal was used by U.S. power plants to generate electricity. That is 37% lower than the all-time high in the U.S. Yet, while more coal plants shut down in the U.S. — putting our electric grid at risk of failure — coal usage around the globe will rise and the U.S. will be exporting coal to countries that may not be as concerned about the environment as we are.

The Wall Street Journal reported that U.S. coal shipments outside the country in 2014 are expected to surpass 100 million tons for the third year in a row, a record string of U.S. coal exports. Those exports look to rise as the global appetite for coal also increases.

In Europe and in Asia, after a slowdown in demand due to economic factors, we are starting to see demand boom again. Instead of retrenching, the U.S. coal industry is looking to add capacity and export even more coal. Accordingly, the U.S. coal industry feels like it is ready to take on the world. A report released by the National Mining Association says U.S. coal to Europe and Asia added $16.6 billion to the U.S. economy in 2011, and that could surge even more as demand around the globe is expected to grow.

While more coal plants shut down in the U.S. — putting our electric grid at risk of failure — coal usage around the globe will rise and the U.S. will be exporting coal to countries that may not be as concerned about
the environment as we are.

There is a feeling in the coal industry that if the EPA closes plants here, there are plenty of places around the globe that will happily buy our coal. U.S. coal will not just sit in the ground.  In the United States, instead of writing the epitaph on coal – the industry is experiencing a real rebirth as an exporting nation that will feed energy to places all around the globe. Thermal coal, shipped by sea, rose 22% between 2011 and 2013 according to data provided by Glencore, and that should surge as demand will rise.

Germany for example will be an active buyer with the closing of their nuclear power plants. While they have spent big money on clean coal technology, other countries in the world have not.  Japan plans to increase its coal-fired capacity by a whopping 21 percent over the next 10 years. India is also adding huge capacity.

Yet in the U.S., the EPA’s desire to reduce our coal addiction could come at a cost. At a time when electric prices should be falling, they could be set to spike. Tim Maverick, of the Wall Street Daily, reported that last winter it was the coal plants that actually kept the lights on. He reported that the PJM Interconnection — a regional electric transmission organization that serves a large swath of the United States from New Jersey to Illinois — was key last winter. On January 7, 2014, it saw the largest-ever peak winter load of nearly 142,000 megawatts. In the rest of that month alone, 8 of the top 10 peak winter loads for PJM occurred. PJM survived, thanks to old coal-fired power plants that are scheduled to be shut down by the EPA soon. “Eighty-nine percent of the coal electricity capacity, that is due to go offline, was utilized as that backup to meet the demand this winter,” said Alaska Republican Senator Lisa Murkowski at a Senate hearing in April.

So what happened this winter? The Wall Street Daily says that about 12,000 megawatts of coal-fired capacity are scheduled to be retired in January 2015 to fulfill regulations established five years ago. Most of those coal-fired power plants are owned by American Electric Power (AEP), the country’s biggest owner of coal-burning power plants. AEP is being forced to close down almost a quarter of its coal-fired generating plants over the next 10 months. This will reduce the total capacity available for some of the country’s most densely populated regions just when the weather may once again push the demand for power to unprecedented levels. AEP’s Chief Executive Officer, Nicholas Akins, told Congress last April, “This country did not just dodge a bullet [this winter] – we dodged a cannonball.” Even the Commissioner of the Federal Energy Regulatory Commission, Philip Moeller, believes the electric grid in parts of the country is “now already at the limit”. This is not good news with regulations removing some of that already-strained generation capacity.

According to Wall Street Daily, while AEP believes the EPA could be willing to extend the coal plant shutdown deadline date, it is possible political pressure will not allow the EPA to grant that deadline. Fears that environmental groups will likely bring lawsuits under the Clean Air Act will force closures regardless. Unless environmental groups give the coal-powered plants a reprieve, a blackout is almost guaranteed in the event of another polar vortex winter.

Demand for U.S. coal will be even higher with geopolitical risk around the globe. The possibility that U.S. coal exports will be needed desperately in Europe will increase if Russia decides to cut off supply because of the conflict with Ukraine. Twenty-five percent of Europe’s gas goes through Ukraine, and if Russia plays hardball, that will only cause the demand for U.S. coal to rise even more.

While the EPA has noble goals, the truth is, like many things in energy, when you try to fix one problem you may be creating many others. 

___________________________________

Phil Flynn is a Senior Market Analyst at The PRICE Futures Group and author of The Energy Report and contributor to the Fox Business Network.

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