Feb 12, 2020, Is The US Coal Industry Completely Burned Out?, Forbes, by Joshua Rhodes
December 3, 2020, Coal’s endgame: The dirtiest fossil fuel is on the back foot, The Economist
“Eliminating coal-fired electricity generation is thus a big but doable deal. Failing to get that deal done will see the world blaze past the Paris agreement’s goal of keeping global warming since the Industrial Revolution “well below” 2°C.”
This is the fourth of a multi-part series on the state of the main sources of energy in the US and how they compare globally. The series will cover solar, wind, oil & gas, coal, nuclear, and geothermal (so far) and will answer the same four questions for each.
1. How big is the US coal industry, and what is its growth trajectory?
US coal employment peaked in the 1920s and the whole sector (mining, transport, and power plants) currently supports about 174,000 jobs. In 2018, US mines produced about 756 million short tons of coal, the majority of which (544 million short tons) was burned in coal-fired power plants to generate 966 billion kWh of electricity, about 24% of all electricity generated in the US in 2018.
However, coal has largely fallen out of favor for electricity production as price declines in natural gas and, to a lesser extent, renewables have made it harder for coal plants to make money in electricity markets. The average US coal plant is now over 40 years old, and there is not a single commercial coal plant under construction in the country. Some scenarios have coal generation remaining flat for the next couple of decades, but most market fundamentals and societal goals indicate further declines.
In the past decade, over 500 coal-fired power units have been retired, or announced their retirement. Further, it is estimated that over 85% of existing coal plants will be uneconomic compared to local renewables by 2025. These dire conditions have many states with regulated electricity markets scrambling to either financially support uneconomic coal plants or provide securitization strategies to allow them to retire early while still making good on their debts. As demand for coal has declined, almost a dozen coal mining companies have filed for bankruptcy in the past 5 years.
On the other hand, US coal exports have been trending upwards as the world economy continues its decade long recovery and demand for energy and goods continues to increase.
Over half of US coal exports are for making steel (metallurgical/coking coal) and the rest for electricity (steam/thermal coal). Major destinations for US coal exports are India (15%), The Netherlands (11%), and Japan (9%), among others. Some countries, largely led by China, are continuing to build coal plants, which could increase demand for US coal exports. Although, some western states have sought to block coal export terminals, forcing some US exports to depart through Canada.
2. Which US states lead in coal?
While Appalachia is home to the vast majority of individual coal mines, the relatively few number of mines in the western Powder River Basin (PRB) produce many more tons of coal annually. Of the 43% of US coal that comes from the PRB, 93% of that (40% of US total) comes from the state of Wyoming. West Virginia produced the second highest amount of US coal, almost 13% of total US production.
Although Texas only produces the poorest quality coal, lignite, it nonetheless consumes more coal than any other state, almost by a factor of two, even though its usage is down almost 20% (2018 vs. 2017). North Dakota consumes the most amount of coal for uses other than power generation.
3. What are the biggest challenges faced by the coal sector today?
By far the biggest realized challenge facing the US coal sector is economic pressure from low cost natural gas, and to a lessor, though growing, extent, renewables. The hydraulic fracturing boom has vastly increased the supply of natural gas, making it stubbornly cheap and the new firm fuel of choice in power generation. A recent study found that low cost natural gas prices was responsible for 85-90% of wholesale electricity price declines in some markets.
Also, the US is generally not building big power plants (of any type) anymore. Coal (and current generation nuclear) plants are generally built as large units to produce cheaper electricity. However, other technologies, such as gas and renewables can be built in smaller sizes, for cheaper, and thus incur less capital risk, making them easier to finance. The US Department of Energy has made a push for small modular coal plants, but there doesn’t appear to be much traction as of yet.
The biggest existential threat faced by the US coal sector is by far climate change. Of the major fuels used to generate electricity in the US, coal produces the most carbon emissions. But technical and political times are changing. About 45% (and growing) of all electricity (by at least 2050) in the US has been pledged to be carbon-free and one of the easiest ways to start to make good on such promises is to shutter coal plants.
4. How does the US coal sector compare globally?
The US produces the third most amount of coal globally, behind India (764 million tons) and even further behind the number one producer, China (3,474 million tons). Indonesia and Australia lead the world in coal exports.
Coal’s future (at least for power production) appears to be burning out. Other technologies, such as gas and renewables, are beating coal on price, flexibility, and finance-ability. Absent significant improvements in carbon capture and sequestration technology, most developed markets, but not all, are likely to continue shuttering their coal fleets over the next couple of decades. However, the world is going to continue to need steel in the short and long-term, and while electric arc furnace metals recycling and new smelting technologies might help reduce the need for metallurgical coal and its associated emissions, the vast majority of steel is still currently made using coal.
(Even by 2016) Nearly half of US coal was produced by companies that have declared bankruptcy — and Trump won’t fix that. Dana Varinsky Dec 9, 2016, Business Insider
Arch Coal, the country’s second biggest producer, filed for bankruptcy in January, and Alpha Natural Resources, the fourth biggest, sought chapter 11 protection in August 2015 (it emerged from bankruptcy in July 2016).
But that doesn’t mean the companies stopped mining or producing the fuel. In fact, approximately 44% of US coal now comes from companies that have declared bankruptcy sometime in the last four years. Those are troubling stats for President-elect Donald Trump, who campaigned on the promise of bringing the country’s declining coal industry back to life.
By choosing Scott Pruitt, an outspoken opponent of environmental rules and ally of the fossil fuel industry, to head the EPA, Donald Trump seems to be sending a message that, as promised, his administration will attempt to roll back air quality regulations and open more federal land to coal mining.
But those efforts won’t counteract the market trend enough to restore coal to its former prominence. Energy industry executives have suggested they aren’t likely to return to coal no matter what Trump does, and even Mitch McConnell warned that it’s hard to tell whether conservatives’ pro-coal efforts will really bring business back, since “it’s a private sector activity.”
Throughout his campaign, Trump repeatedly blamed what he called “Obama’s war on coal” for this stark decline, alleging that government regulation was killing American jobs and making the country less energy independent.
The sector is indeed in a downward spiral. Coal production in the beginning of 2016 hit the lowest level it’s been since a major strike in 1981, and that the current number of coal employees (approximately 66,000 in 2015) is the lowest on record since the US Energy Information Administration began collecting data in 1978.
But while air quality rules and renewable energy subsidies have created incentives to move away from coal, the irony is that the real opponent in the “war” is the free market.
Several factors, all of which are mostly out of lawmakers’ control, have had major impacts on the coal business over the last decade. First, thanks to hydraulic fracturing (fracking) technology, natural gas has become a more desirable fuel because it burns cleaner and is cheaper than coal. In 2000, half of the US’ electricity came from coal-powered plants and about 15% came from natural gas, according to a Brookings Institution analysis; today coal and gas each make up about a third of the country’s electricity generation.
Additionally, prices of renewables have fallen dramatically — the cost of building a solar photovoltaic plant has fallen by about 80 percent since 2009, making it more financially feasible for states to invest in solar and wind power. Third, as buildings and other facilities have become more energy-efficient and begun gathering power from rooftop solar panels, electricity sales in the US have started to flatten. Plus, a slowing of the Chinese economy has caused exports to go down, and automation has replaced jobs in mines and coal production facilities.
In addition to sending former miners into unemployment and financial hardship, the recent slew of bankruptcies poses two other serious problems. Coal companies are legally bound to pay for cleanup around mine sites. Most are required to get a bond to insure that reclamation happens even if they go under. But a loophole allows the biggest corporations to self-bond, meaning that they guarantee their own future cleanup funds. With three of the four biggest producers in or just out of bankruptcy, that opens the possibility that they won’t pay to reclaim the land, leaving polluted water and illness-causing dust behind.
Companies in bankruptcy also often suggest that they can’t afford to keep doling out pension funds, and attempt to drop the retiree benefits they committed to pay. According to NPR, this could be the case for 16,000 retired miners in seven states by the end of 2016. Senate Democrats have been working to pass a proposal for the government to cover these benefits, called the Miners Protection Act, but it has faced opposition from Mitch McConnell and other Republicans.
Even if the plan were to go through, however, it would use funds set aside for the reclamation of abandoned mines (those left behind without proper cleanup, a situation that now seems somewhat likely) and transfer the money to pay for canceled pensions.
It’s a complicated problem that simply rolling back regulations will not fix.
The coal industry is collapsing in Kentucky, and companies are using bankruptcy protection to abandon their obligations to reclaim mines. The abandonments that are currently happening are leaving many thousands of acres of disturbed land to the elements. State-sanctioned abandonment is also occurring as companies are seeking deferrals of their reclamation obligations until the coal market returns. Ultimately, the abandoned mine sites are the responsibility of state agencies that have far too little money available for proper reclamation.
A recent Vox article by David Roberts entitled Coal left Appalachia devastated. Now it’s doing the same to Wyoming describes the irresponsible practices that result in bond forfeiture: “Basically, as the industry contracts, it’s a game of hot potato, as failing mines get passed around to increasingly fly-by-night companies that extract a little value before passing them along or going under.”
Coal left Appalachia devastated. Now it’s doing the same to Wyoming.
. ..the very communities that have supported it most are getting screwed over in the process. Lately it has only gotten worse, as companies declare bankruptcy, executives get healthy bonuses, polluted coal mines are abandoned, and miners and retirees are denied long-promised health benefits and pensions. Vulture capitalists are buying up mines, squeezing out the last bit of profits, and declaring bankruptcy, leaving behind an environmental mess and workers without jobs or pensions. 43% of the country’s coal is from the Powder River Basin: “While the signs have been there for a while, Wyoming’s leaders have done little to pivot our state’s economy away from this volatile industry,” writes the Casper Star-Tribune editorial board. “But there’s no more time. The fallout from the inevitable bust … would be widespread and devastating to the entire state CEOs and top executives, the very crew that drove companies into a ditch with gross errors in judgment, will receive “retention” bonuses and emerge from the process wealthier than ever, no worse for the wear, while vendors, workers, and the state are left unpaid, as Clark Williams-Derry explains.” Peabody, Arch, and Alpha all went heavy into metallurgical coal in the early 2010s, on the assumption that China would grow at its headlong early-2000s pace forever. Wyoming workers were given no advance warning with closures and paychecks are reportedly bouncing in Kentucky as well. Roberts writes about the Peabody bankruptcy here and here and the Alpha bankruptcy here and here, but says broadly speaking, their story is the same as Cloud Peak’s: “restructuring” left executives enriched and everyone else, including workers, hosed. As the industry contracts, it’s a game of hot potato, as failing mines get passed around to increasingly fly-by-night companies that extract a little value before passing them along or going under. As one company after another “restructures” through bankruptcy, they ditch social and environmental obligations, even as executives prosper. It’s vulture capitalism, stripping everything down to the remaining valuable assets, the remaining mines and coal, and casting everything else, including mining communities and the grotesquely scarred landscape, overboard. the resource-extraction model. It’s known as the “resource curse” — economies rich in natural resources and dependent on export commodities tend to grow more slowly and perform worse on a range of social indicators, and they are left worse off when the resources dry up. It’s true at the international level, but also within countries, states, and even, to some extent, cities. Resources that can be mined or drilled are a boon to wealthy investors, but rarely to the people and land they lie beneath. Now the curse has come to Wyoming, and feckless leaders are letting it happen.
Coal will go out doing what it always does: offloading costs
What’s unfolding in Wyoming is a perfect example of a business model that has already been used in Appalachia, for old California oil wells, for offshore oil wells, and will likely be used soon for shut-down coal plants and other abandoned fossil fuel infrastructure. First, the big companies went bankrupt and were restructured. They were desperate to get rid of the mines — and the associated health, pension, and reclamation obligations. So in came the scavengers, to buy those mines for cheap, with vague promises to renew them (sometimes an affiliate of the same company). That is the model: buy the mines (or assets) for cheap from a company in restructuring, thereby escaping health, pension, and environmental obligations; take out huge loans to keep the mines going; pay yourself and your executives handsomely from those loans; and then, when the mine goes under anyway, pay yourself additional bonuses for “managing” your own bankruptcy and walk away richer than you started. “Corporations have hacked bankruptcy law,” says Williams-Derry. “Many insiders walk away from bankruptcy with a decent-size payday, with ‘key employee retention plans’ and bonuses to keep the management team in place during bankruptcy. And for the C-suite, even if they don’t get rich, there’s no permanent downside to bankruptcy.” Why are courts and regulators letting this happen?… All those institutions bent over backward to keep the house of cards upright. Regulators and courts seem frozen like deer in headlights, unable to wrap their heads around what’s going on. They can understand companies going bankrupt, but they cannot fathom that mines still producing coal might be worthless. “The rules were designed to deal with the failure of individual small mining companies,” says Williams-Derry. “But the idea that the industry as a whole might collapse … it’s just completely absent.”
And everyone fears that cracking down on these companies might only hasten the loss of jobs. So the vulture capitalists keep getting away with it… (state) leadership stands by gawking as the resource curse runs its course yet again. And the very politicians who have power in those states, who made cozy deals with wealthy coal executives, who have systematically lied to their constituents about the fate of coal, are … doubling down on their lies.
The article concludes: The truth is, the US coal industry has never been a capitalist enterprise. In a purely capitalist system, a business pays all its own costs and keeps all its own profits. The business model of the coal industry, as with most extractive industries, wherever they operate, is to capture the profits while avoiding the costs. That’s why they appear profitable as long as they do: Their steadily rising costs, in terms of humans (deaths, injuries, illnesses like black lung), the local environment (scarred land, dirty water, air pollution), and the atmosphere (climate change) are kept off their books. The public pays for those. The business model only works as long as the industry is able to offload costs. Many (legislators and executives) offload costs — help them fight unions; diminish health, safety, and pollution regulations; and avoid their social and environmental responsibilities. It’s the only way coal companies ever stay in business…Calling it “capitalism” would make Adam Smith roll over in his grave. Extraction industries are largely a scam through which wealthy people remove value from a region and leave behind social and environmental ruin. It’s happening with coal, in Appalachia and now in Wyoming, but the model is not coal’s alone. It’s happening with oil and gas as well. It is the nature of an extraction economy. Fossil fuels rest on a foundation of colonialist exploitation and rent-seeking. That’s how they came in; that’s how they’ll go out
Wyoming is facing a potential crisis. Coal mines have shut down, hundreds of people are out of work, unemployment offices are overwhelmed, and there appears to be worse to come.
The coal industry, long seen as a friend and economic linchpin in the state, is falling apart, and the very communities that have supported it most are getting screwed over in the process.
This wasn’t supposed to happen in Wyoming. After all, it’s not like Appalachian coal country (West Virginia, eastern Kentucky, and Pennsylvania, along with eastern Ohio and parts of Alabama, Maryland, Tennessee, and Virginia).
Appalachia, which has been ground into codependent poverty by the coal industry over the course of a century, has been declining, in coal output and employment, for decades. Lately it has only gotten worse, as companies declare bankruptcy, executives get healthy bonuses, polluted coal mines are abandoned, and miners and retirees are denied long-promised health benefits and pensions.
But it has long been industry conventional wisdom that Western coal would continue to prosper, at least for a while. The coal boom in the Powder River Basin — the largest coal basin in the US, the source of 40 percent of American coal, spanning northeast Wyoming and southeast Montana — dates back to the early 1970s. It has resulted in a few large companies with deep local roots, their taxes funding infrastructure and schools. Their steady profitability has made coal the heart of several Western communities. There are 13,000 coal-dependent jobs in the PRB.
It’s beginning to look like conventional wisdom was wrong. Western coal is declining too, and as it does, vulture capitalists are buying up mines, squeezing out the last bit of profits, and declaring bankruptcy, leaving behind an environmental mess and workers without jobs or pensions.
It’s shaping up to be Appalachia all over again, in communities thatwere told it would never happen.
“While the signs have been there for a while, Wyoming’s leaders have done little to pivot our state’s economy away from this volatile industry,” writes the Casper Star-Tribune editorial board. “But there’s no more time. The fallout from the inevitable bust … would be widespread and devastating to the entire state.”
We’ll start by explaining the most recent news and work our way back to the big, awful picture for the coal industry in the US.
Two Wyoming mines just went dark, with no warning
Last Monday, the country’s sixth-largest coal producer, the mining company Blackjewel LLC (and its parent company Revelation Energy), struggling with mounting debts and unanticipated expenses, declared Chapter 11 bankruptcy. Immediately thereafter, it was denied an emergency line of credit by a bank and abruptly shut down its Eagle Butte and Belle Ayr mines. Around 600 Wyoming miners were left out of work, with no advance warning, and the mines were left unstaffed.
Robert Godby, an energy economist at the University of Wyoming, described it as “a heart attack in the Powder River Basin.” Eagle Butte and Belle Ayr are the fourth and sixth top-producing mines in the US; Belle Ayr, just south of Gillette, Wyoming, was the first big mine to open in the PRB, back in 1972.
In some cases, the miners’ final paychecks, cashier’s checks flown in at the last minute, were held by banks or failed to clear. Local unemployment centers were almost immediately overwhelmed and reportedly ran out of materials on retraining within 24 hours. (Blackjewel paychecks are reportedly bouncing in Kentucky as well.)
Scenes from a public meeting about the recent Blackjewel mine closures at the Campbell County Courthouse today. The Eagle Butte and Belle Ayr mines near Gillette closed and sent roughly 700 workers home after Blackjewel LLC filed for bankruptcy yesterday. pic.twitter.com/5yJNmJgVYc— Josh Galemore (@joshgalemore) July 2, 2019
On Wednesday, a West Virginia bankruptcy judge denied a $20 million refinancing plan, but approved $5 million in emergency funding, not to reopen the mines but to monitor them for safety purposes. One condition of the loan was that Blackjewel CEO Jeff Hoops resign, that all members of his family resign, and that none of them be allowed access to any Blackjewel business or bank accounts. (More on Hoops later.)
For now, the restructured company is desperately seeking financing. If it does not succeed, it may be forced into Chapter 7 bankruptcy (liquidation), at which point it, or its creditors, would be forced to sell the mines. If they don’t find a buyer, the mines could be shut down for good, at which point environmental reclamation would begin. Some 1,700 jobs are on the line across the company.
The Wyoming Department of Environmental Quality (DEQ) told Wyoming Public Media that Blackjewel has sufficient bonds to cover reclamation, but community advocates are skeptical. Recent tax forms reveal about $237 million in bonds; it’s uncertain whether that will cover reclamation, which could take up to 20 years.
Just a few months earlier, in May, another big PRB mining company, Cloud Peak Energy, which owns three giant mines in Montana and Wyoming, also declared bankruptcy. Its fate offers a preview of what lies ahead for Blackjewel.
There were winners in the Cloud Peak bankruptcy: the CEO and top executives, the very crew that drove the company into a ditch with gross errors in judgment, will receive “retention” bonuses and emerge from the process wealthier than ever, no worse for the wear.
The losers, as Clark Williams-Derry explains in a post for the think tank Sightline, include everyone else: all the vendors to whom the company owes money, from the unsecured bondholders at the bottom of the stack (including many small local suppliers) to the secured bondholders above, who may end up stuck with the company’s near-worthless mines; miners, who are likely to see health benefits and pension plans canceled; and shareholders, who will be wiped out.
That’s more or less the model, and it’s not new.
Before Cloud Peak, in late 2018, it was the large Western mining firm Westmoreland going bankrupt. And before that, in 2015 and 2016, three of Wyoming’s biggest coal producers — Peabody Energy, Arch Coal, and Alpha Natural Resources — declared Chapter 11 and underwent restructuring. Almost 500 workers lost their jobs on a single day in 2016.
I wrote about the Peabody bankruptcy here and here and the Alpha bankruptcy here and here, but broadly speaking, their story is the same as Cloud Peak’s: “restructuring” left executives enriched and everyone else, including workers, hosed.
And here’s a funny story.
As part of Alpha’s restructuring, it spun off a new company, Contura, which took over its two Western crown jewels: the Eagle Butte and Belle Ayr mines (yes, the very mines that just closed). Contura quickly turned around and sold/gifted those mines to Blackjewel, a newly created subsidiary of Revelation Energy, an Appalachian mining firm owned by Hoops. In doing so, Contura expected to write off $400 million in taxes and $200 million in reclamation liabilities.
Basically, as the industry contracts, it’s a game of hot potato, as failing mines get passed around to increasingly fly-by-night companies that extract a little value before passing them along or going under.
As one company after another “restructures” through bankruptcy, they ditch social and environmental obligations, even as executives prosper. It’s vulture capitalism, stripping everything down to the remaining valuable assets, the remaining mines and coal, and casting everything else, including mining communities and the grotesquely scarred landscape, overboard.
Why is this happening?
Coal is going out faster than anyone expected, and it’s leaving wreckage behind
Coal’s ongoing demise has been written about a great deal, but there are some subtleties that help explain the current situation.
The big coal bankruptcies in 2015 and 2016 were not primarily due to coal getting beat on US electricity markets (though that is also happening). Rather, those companies made extraordinarily large and ill-advised bets on metallurgical coal, a special variety best adapted to steelmaking, meant for export abroad. Peabody, Arch, and Alpha all went heavy into metallurgical coal in the early 2010s, on the assumption that China would grow at its headlong early-2000s pace forever.
China … didn’t. And those companies — or rather, their employees and shareholders — got hosed.
PRB coal was supposed to be somewhat immune to that, as it is primarily used domestically, in US coal-fired power plants.
While PRB coal is not as energy-dense as Appalachian coal, it has lower sulfur content, which makes it easier for power plants to comply with modern pollution standards. Consequently, power companies have been moving their business from Appalachia to the PRB for years.
But betting on US coal demand isn’t working out either. Thermal coal (the kind used for electricity) has been on the decline in the US, as cheap renewables and natural gas eat into coal’s market share, and the PRB has declined with it. As Ben Storrow reports for E&E, production in the basin fell “from 462 million tons in 2011 to 324 million tons last year.” Now, as coal plants close left and right, the latest projections have it heading to 175 million, well under half its heyday.
Still, most industry observers assumed a longer exit path. “Up until a few years ago, everyone, including me, knew that thermal electricity from coal was declining, but the Powder River Basin stood as the healthiest of the coal-producing areas,” Godby told the Casper Star-Tribune. “People in Wyoming took that for granted.”
Few imagined that coal’s decay would continue and accelerate to the point that producing mines might become worthless. That’s why regulators allowed shady operators from Appalachia to buy up the Western mines from the bankrupt companies. (More on that below.) They didn’t see the risk. The mines were supposed to be fine.
Yet coal’s decline has proven faster than anticipated, and PRB companies, accelerated by mismanagement, are dropping like flies. The market is turning away from their product.
Now Wyoming is facing another boom-and-bust episode, shaping up to be much the same as the last one. In a great piece that ties this story together as well as anything I’ve read, Bob LeResche of the Powder River Basin Resource Council recounts some recent Wyoming history:
When the coal bed methane boom went bust a few years ago [in 2015], big, responsible operators rushed to sell — or often give — multiple methane leases, hundreds of wells and infrastructure to newly hatched and poorly capitalized LLCs created by ‘get-rich-quick’ artists. These companies also relieved the original owners of huge liabilities: for taxes, surface use agreements, royalties, idle well bonds. Most of the new operators sold what gas they could and then quickly defaulted, leaving landowners with idle wells, eroded and disrupted surface lands, noxious weeds, uncollected royalties and rentals. They left the State of Wyoming with thousands of abandoned orphan wells and the need to spend tens of millions of dollars to plug and rehabilitate them.
NowWyoming legislators, regulators, and judges show every sign of sleepwalking into another round of the same issues.
It is no coincidence that this happened before in Wyoming, that it happened in Appalachia, that it’s happening on indigenous lands in Canada, that it’s happening in Nigeria and Angola. This is the resource-extraction model. It’s known as the “resource curse” — economies rich in natural resources and dependent on export commodities tend to grow more slowly and perform worse on a range of social indicators, and they are left worse off when the resources dry up. It’s true at the international level, but also within countries, states, and even, to some extent, cities.
Resources that can be mined or drilled are a boon to wealthy investors, but rarely to the people and land they lie beneath. Now the curse has come to Wyoming, and feckless leaders are letting it happen.
Coal will go out doing what it always does: offloading costs
What’s unfolding in Wyoming is a perfect example of a business model that has already been used in Appalachia, for old California oil wells, for offshore oil wells, and will likely be used soon for shut-down coal plants and other abandoned fossil fuel infrastructure. It’s a way for industries that lived by rent-seeking to die by it.
First, the big companies went bankrupt and were restructured. They were desperate to get rid of the mines — and the associated health, pension, and reclamation obligations. So in came the scavengers, to buy those mines for cheap, with vague promises to renew them.
One of those scavengers was Jeff Hoops. His company Revelation Energy LLC bought up hundreds of small mine permits in Appalachia and is known for a long history of safety and environmental violations. (According to an April investigation by the Ohio Valley Resource, Hoops faces more than $926,000 in delinquent mine safety fines.)
He spun off an affiliate, Blackjewel LLC, just to buy the two mines from Contura (the shell company created by Alpha to offload them).
Another is Tom Clarke, a failed nursing home entrepreneur from Virginia who turned to buying up distressed iron and coal mines a few years ago, promising to clean them up and turn them around, and then … not. He was behind the high-profile bankruptcy of Mission Coal last year and has been involved in at least 10 bankruptcy cases over the years. Nonetheless, the bankruptcy court allowed him to buy the Kemmerer mine (in southwest Wyoming) from Westmoreland Coal Company, the 150-year-old company that went bankrupt last year. In buying it, he escaped the mine’s union contract and its pension obligations. [Correction, 7/10/19: Turns out Clarke did not purchase the mine; it fell through at the last minute, when it became clear he hadn’t secured reclamation bonds. Westmoreland asked for more collateral and Clarke bailed. Thanks to Wyoming Public Media reporter Cooper Katz McKim for flagging it.]
That is the model: buy the mines (or assets) for cheap from a company in restructuring, thereby escaping health, pension, and environmental obligations; take out huge loans to keep the mines going; pay yourself and your executives handsomely from those loans; and then, when the mine goes under anyway, pay yourself additional bonuses for “managing” your own bankruptcy and walk away richer than you started.
(Hoops isn’t allowed to run Blackjewel any more, but he’s plenty rich. He will likely still be able to build the 189-acre resort he has planned for his hometown of Milton, West Virginia, complete with a 3,500-seat replica of the Roman Coliseum. It will be called — and I am not kidding — Grand Patrician. According to Hoops, though, “no one is hurting more than me.” According to Gillette Mayor Louise Carter-King, “If I were him, I wouldn’t show up in Wyoming.”)
“Corporations have hacked bankruptcy law,” says Williams-Derry. “Many insiders walk away from bankruptcy with a decent-size payday, with ‘key employee retention plans’ and bonuses to keep the management team in place during bankruptcy. And for the C-suite, even if they don’t get rich, there’s no permanent downside to bankruptcy.”
Why are courts and regulators letting this happen?
Again, the case of Blackjewel is instructive. By the end, it had accrued $500 million in debts — to local vendors ($156 million), the Bureau of Land Management (BLM) for royalties, the Mine Safety and Health Administration (MSHA) for violations, and several states for back taxes ($6 million in Kentucky; $1.6 million Virginia; $17 million in Campbell County, Wyoming). The Eagle Butte and Belle Ayr mines alone owe $60 million in royalties and $37 million in county taxes.
All those institutions bent over backward to keep the house of cards upright. They extended Blackjewel’s loan payments, put the company on a royalty payment plan (“the BLM is very accommodating when you can’t make your payments,” Hoops said in bankruptcy court), and watched as payroll taxes were withheld but not remitted and 401(k) payments withheld but not deposited.
Regulators and courts seem frozen like deer in headlights, unable to wrap their heads around what’s going on. They can understand companies going bankrupt, but they cannot fathom that mines still producing coal might be worthless. “The rules were designed to deal with the failure of individual small mining companies,” says Williams-Derry. “But the idea that the industry as a whole might collapse … it’s just completely absent.”
And everyone fears that cracking down on these companies might only hasten the loss of jobs. So the vulture capitalists keep getting away with it.
Coal has always lived by rent-seeking; now it will die rent-seeking
In Wyoming, leadership stands by gawking as the resource curse runs its course yet again. And the very Republican politicians who have power in those states, who made cozy deals with wealthy coal executives, who have systematically lied to their constituents about the fate of coal, are … doubling down on their lies.
So here’s Wyoming Rep. Liz Cheney, ludicrously (still!) blaming “Obama’s War on Coal” for the mine closures and pledging “to stop the coal company exodus.” Oh? How does she plan to do that? She doesn’t say. She just repeats the latest administration propaganda: “Ensuring the reliability of our electric grid by supporting coal — a crucial baseload power source — is an economic and national security priority.”
Meanwhile, Republican Senate Leader Mitch McConnell continues to block consideration of a bill that would ensure miner pensions, despite pleas from West Virginia Democrats.
The truth is, the US coal industry has never been a capitalist enterprise. In a purely capitalist system, a business pays all its own costs and keeps all its own profits.
The business model of the coal industry, as with most extractive industries, wherever they operate, is to capture the profits while avoiding the costs. That’s why they appear profitable as long as they do: Their steadily rising costs, in terms of humans (deaths, injuries, illnesses like black lung), the local environment (scarred land, dirty water, air pollution), and the atmosphere (climate change) are kept off their books. The public pays for those. The business model only works as long as the industry is able to offload costs.
Republicans (along with a shrinking number of Democrats from coal states) help coal executives offload costs — help them fight unions; diminish health, safety, and pollution regulations; and avoid their social and environmental responsibilities. That has always been the role of politicians in coal states. It’s the only way coal companies ever stay in business, which is one reason infamous coal CEO Bob Murray is hosting a fundraiser for President Trump later this month. Calling it “capitalism” would make Adam Smith roll over in his grave.
Extraction industries are largely a scam through which wealthy people remove value from a region and leave behind social and environmental ruin. It’s happening with coal, in Appalachia and now in Wyoming, but the model is not coal’s alone. It’s happening with oil and gas as well. It is the nature of an extraction economy.
Fossil fuels rest on a foundation of colonialist exploitation and rent-seeking. That’s how they came in; that’s how they’ll go out.
As the coal industry is entering its second major round of bankruptcies this decade, ACLC is leading a project to gather and report on the status of mine sites that are being abandoned. As we do so, we are advocating on behalf of a number of grassroots groups to ensure that mined land is properly reclaimed. https://www.vox.com/energy-and-environment/2019/7/9/20684815/coal-wyoming-bankruptcy-blackjewel-appalachia
Here’s the Ugly Mess Coal’s Decline Could Leave Behind
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When Arch Coal filed for bankruptcy in January, it was just the latest sign that the coal industry is facing a serious problem. In the past year, four major coal companieshave filed for Chapter 11, crippled by massive debt and falling demand. And this may be just the beginning: A recent report from the consulting firm McKinsey & Company concluded that the industry is in for a painful contraction and is “still in the early stages of what could be decades of financial difficulty.”
To anyone concerned about climate change, the prospect of a shrinking coal industry is welcome news. But it may come with a troubling consequence, thanks to a provision in the federal Surface Mining Control and Reclamation Act (known as SMCRA) that has allowed some of the biggest coal companies to avoid setting aside funds to clean up their mines. Now, with the industry’s future looking bleak, concerns are growing about the possibility that if we want to see massive mine sites filled in, vegetation replanted, and polluted waterways restored, taxpayers could end up footing the bill.
Coal companies are supposed to clean up after themselves, and SMCRA, which was passed in 1977 to put an end to more than a century of mine abandonment that had scarred more than a million acres of land, includes bonding requirements to ensure that companies can’t shirk their obligations. “The most fundamental protection offered by the federal and state surface mining laws,” says Peter Morgan, an attorney with the Sierra Club, “is the requirement that not a single shovelful of dirt can be moved on a coal mine until the company has posted a reclamation bond adequate to allow state regulators to finish reclamation, should the company liquidate or cease to exist.”
But some producers have taken advantage of an option called a “self-bond.” Reserved for companies that can pass certain financial tests, self-bonding amounts to a legally binding promise that when the time comes for reclamation, the company will have the cash on hand to cover the costs.
Coal companies like self-bonding because it lets them avoid putting up collateral or paying a fee to a surety company. “This is a big giveaway for the industry,” says Shannon Anderson, an attorney with the Powder River Basin Resource Council in Wyoming. More than $3 billionin coal-mine reclamation liability is self-bonded today, two-thirds of it in Wyoming, where 40 percent of U.S. coal is mined.
The problem is that the self-bonding system was designed for a financially robust industry, and now its risks are starting to become apparent. Right now two of the biggest coal companies in the United States, Arch and Alpha Natural Resources, are in Chapter 11 bankruptcy. And each of those companies holds hundreds of millions of dollarsof self-bonded reclamation liability, Arch’s in Wyoming ($485 million), and Alpha’s in Wyoming ($411 million) and West Virginia ($244 million).
If it seems perplexing that companies on the verge of bankruptcy would qualify for a system premised on financial fitness, well, that’s the problem. Self-bonded companies must pass regular stress tests, so in theory if a company is in trouble it will fail its test and will have to replace its self-bonds with surety or collateral bonds. But things haven’t quite worked out that way. Last summer, prior to Alpha’s declaring bankruptcy, regulators in Wyoming and West Virginia did tell the company that it no longer qualified for self-bonding and instructed it to substitute its bonds. But it was too late; in August, before the substitution deadline was up, the company filed for Chapter 11, its reclamation bonds still unsecured. And in the case of Arch, the company stillqualified for self-bonding in the eyes of Wyoming regulators even as it entered bankruptcy. That’s because of a loophole in the law that allows parent companies to submit the financials of a subsidiary for scrutiny instead of those of the company as a whole. According to Reuters, Arch Coal’s SEC filings show that the company hasn’t met the self-bonding qualifications itself since 2012.
Both Alpha and Arch have continued to operate as they try to restructure their debt and climb out of bankruptcy. Even if they do so successfully, if the industry continues to decline as predicted, these surely won’t be the last potential bankruptcies we see. Many analysts predict, for instance, that Peabody Energy, which as of last March held nearly $1.4 billion in self-bonds in Wyoming, Illinois, New Mexico, Colorado, and Indiana, will be next. In any event, in the long term not all companies will be able to stay afloat.
What would happen if a self-bonded company were to liquidate and abandon its mines? This is uncharted territory, so no one really knows. “The statute was set up in a way that, in theory, it could never happen,” says Mark Squillace, a professor of natural resources law at the University of Colorado. The state could get in line in bankruptcy court to make a claim, but it “would definitely fall behind all of the company’s secured creditors,” says Morgan. States could get a priority claim on something—for example, in the Alpha and Arch bankruptcies, regulators in Wyoming and West Virginia have struck deals that would entitle the states to a certain amount of money should those companies go bust. But in each of those deals the funds the state has secured amount to less than 20 percent of the company’s actual liability. (West Virginia does have its own reclamation fund it could tap, though John Morgan, a member of the fund’s advisory council, says it could be “significantly challenged” by a large liability.)
To prepare for the eventual possibility of unreclaimed mines, Anderson says Wyoming could look to another source: the federal Abandoned Mine Lands Fund. AML Fund money is meant to be used for the reclamation of lands mined in the pre-SMCRA era, distributed to states as a grant. But in Wyoming, where the worst old mine pollution has been largely cleaned up, the state has wider latitude with the funds, and Anderson argues that the state could potentially work out an arrangement to establish a trust for future cleanup costs. But the state legislature has so far taken no steps in that direction—of the $241 million in AML Funds Wyoming is set to receive this year, the spending bill currently before the legislature would put about $70 million toward ongoing pre-1977 mine reclamation work, while about $160 million would go toward funding highways—including $24 million to relocate roads in order to help coal companies access new mining areas.
With the hazards of the self-bonding system becoming increasingly obvious, the Interior Department’s Office of Surface Mining Reclamation and Enforcement is now stepping in, setting the stage for a potential showdown with state regulators. In January, in its first real action on the matter, OSMRE sent notices to the Wyoming Department of Environmental Quality questioning whether Alpha and Arch were operating with sufficient bonding in place, and the following month it sentsimilar notices about Peabody to Wyoming, New Mexico and Colorado. In its official responses to the Alpha and Arch notices, the Wyoming DEQ acknowledged “certain systemic problems” but strongly defended its oversight and maintained that both companies were in compliance with bonding requirements. It also added that “having cleared the low bar of rationality and lawfulness, OSMRE is not permitted to second-guess the wisdom of DEQ’s settlement agreement.” (Regulators haven’t yet responded to the Peabody notices.) It remains to be seen what OSMRE’s next move will be, but Interior Secretary Sally Jewell has signaled that she doesn’t plan to back off the issue, telling reporters last week that “we need to make sure that those companies are held accountable.”
But how? Regulators in Wyoming and West Virginia say that Alpha and Arch will have to replace their bonds if and when they emerge from bankruptcy, and theoretically states could require Peabody to do the same. But it’s not clear that a financially fragile company could replace its bonds. “Once things get resolved in the bankruptcy courts, these companies have two options,” says Greg Conrad, the executive director of the Interstate Mining Compact Commission, an association of state regulators. “They could either put up collateral, which most of them are not likely to have, or if they do have it they probably won’t have enough of it; or they’re going to have to seek a surety bond or line of credit,” which they may not qualify for or be able to afford. Conrad also points out that if these companies managed to obtain surety bonds it would eat up a significant portion of the surety industry’s capacity, which could have unintended consequences on other coal companies. “There are no easy answers here,” he says.
If a company that no longer qualifies for self-bonding can’t afford real bonds, that leaves the state in a difficult position. It can tell the company to stop mining, and take the risk that the public could end up with an abandoned mine on its hands; or it can allow the company to keep mining without legally sufficient bonding in place and wait for its financial health to stabilize to the point that it can replace its bonds—which also carries the risk that the public could end up with an abandoned mine on its hands, if the company doesn’t actually recover. “It’s not hard to think of this in terms of the companies really holding all the cards,” says Morgan, “because the states allowed them to self bond for so long.”
If states do end up giving coal companies time to replace their bonds, Squillace has a suggestion: Force them to step up their reclamation. “This is critical,” Squillace says. “We need to reduce the extent of reclamation liability, as quickly as possible.” Companies are supposed to do “contemporaneous” reclamation, meaning they reclaim land as they go. But according to a report released last year by the Natural Resources Defense Council, the National Wildlife Federation, and the Western Organization of Resource Councils, of the 450 square miles of disturbed mine lands in Montana, Wyoming, and North Dakota, only 46 have been fully reclaimed.
In the big picture, “the best thing is to move away from self-bonding, and really take stock of the system,” says Anderson. “The good thing is that states can actually do that. Self-bonding is not a requirement of our surface-mining law—it’s an option.” There’s been some, if not much, movement in that direction: Colorado officials said earlier this year that the state would move away from the practice, and a spokesperson for the West Virginia Department of Environmental Protection told Audubon that that while there have been no policy changes, “due to the uncertainty with the coal industry right now” the agency is not currently allowing any companies besides Alpha to self-bond, and that until Alpha’s bonds have been replaced the company won’t be allowed to disturb any new land except to facilitate reclamation. Meanwhile, the IMCC has established a bonding working group that will look at the issue, and Conrad says that he can envision some kind of structured process to successfully transition companies out of self-bonds and ensure that no reclamation slips through the cracks. In any case, it’s clear that regulators will need to come up with some process to move forward. “There are substantial liabilities that somebody is going to have to cover,” Squillace says, “or the public will have to live with unreclaimed land for a long time to come.”
A version of this story ran in the March-April issue of Audubon under the headline “Dirty Business.” This expanded, updated version was published online on February 29, 2016. https://www.audubon.org/magazine/march-april-2016/heres-ugly-mess-coals-decline-could-leave
The dirtiest fossil fuel is on the back foot: Time to topple it for good
Escalante, a coal-fired power station north of New Mexico’s Zuñi mountains, is designed to produce some 250mw of electricity. Since August, however, it has produced none. Nor will it ever do so again.
The economic slump brought on by the covid-19 pandemic hit electricity demand around the world; non-renewable generators of all sorts reduced their output. But in many places the owners of coal-fired plants went further.
- Britain shut a third of its remaining coal-fired generating capacity in the first half of the year.
- In June Spain closed seven coal-fired stations from A Coruña to Córdoba, halving the country’s coal capacity.
- Even in India, where coal generates nearly three-quarters of all electricity, the crown slipped a tiny bit: 300mw of Indian coal-fired power was retired in the first half of the year, according to Global Energy Monitor, a non-profit, and no new coal plants were built.
Consumption of coal has been on a slightly downward-sloping plateau for some years. But the capacity to burn it continued to increase, suggesting that things might change. Now the world’s capacity to generate electricity from coal, too, has begun to drop (see chart 1). It is a significant milestone in the fight against climate change.
For the world to meet the ambitions it set itself at the Paris climate summit five years ago, that milestone needs to quickly vanish in the rear-view mirror: coal’s decline needs to be made both steep and terminal. Coal-fired generation typically emits a third of a tonne of carbon dioxide for every megawatt-hour of electricity generated, around twice the emissions from a natural-gas plant. And although coal is used directly in some industrial processes, such as steelmaking, two-thirds of the stuff is burned to generate electricity—a role that many other technologies can fulfil more cleanly and even more cheaply.
Eliminating coal-fired electricity generation is thus a big but doable deal. Failing to get that deal done will see the world blaze past the Paris agreement’s goal of keeping global warming since the Industrial Revolution “well below” 2°C.
A tale of three continents
The global peak in coal-fired capacity masks divergent stories in different countries. In the West, countries whose economic ascent was powered by coal and colonialism have been reducing their coal use for years and are shedding capacity with gusto. In South America and Africa—South Africa apart—coal has never been a big part of the energy mix. But Asia’s largest countries depend overwhemingly on coal for the electricity their economies need, and they are still adding capacity.
Merely using the capacity they already have in place could easily push the world past the Paris limits. According to Dan Tong, a researcher at University of California, Irvine, coal plants operating and proposed in 2019 would, if operated to the end of their lives, emit 360bn tonnes of carbon dioxide—a total dominated by Asia.
The Intergovernmental Panel on Climate Change (ipcc) calculates that if the world is to have a decent chance of keeping warming below 1.5°C—the Paris agreement’s stretch goal—it has to keep all future emissions of carbon dioxide and other greenhouse gases down to the equivalent of 420bn-580bn tonnes of carbon dioxide. Today’s coal plants could use up 60-85% of that budget on their own. The 2°C budget is more generous: 1,170bn-1,500bn tonnes of carbon dioxide. But if existing coal plants use up between a quarter to a third of that allowance, the chances of staying within the bounds are slim.
Coal’s decline in the West has been made possible by three mutually reinforcing developments: government policy, cheaper alternatives and restricted access to capital.
A growing number of governments have adopted policies designed to support clean energy and/or to eliminate coal. In 2013 Britain imposed a “carbon-price floor” on emissions by electricity generators which made coal a more expensive fuel. In 2015, in the run-up to Paris, the country mandated that coal-fired power in England, Wales and Scotland be phased out within a decade. Sixteen countries in the European Union either have a plan to phase out coal or are mulling one; even in those that do not, the carbon prices imposed by the eu’s Emissions Trading Scheme have made burning coal more expensive in recent years. Some owners of coal-fired stations have chosen to shut them rather than make the investments necessary to comply with new environmental standards which enter into force next year.
They can do so because of the increasing availability of other sorts of power. In America the alternative which started coal’s rout was a glut of gas created by the country’s fracking boom. But at both federal and state level America has also supported renewables, as has Europe. And as those policies have increased the scale at which renewables operate, their costs have plunged. Bloombergnef, a data group, calculates that better technology and cheap capital mean that, if you divide the amount of energy that can be expected over the lifetime of a new solar farm in Germany by the cost of building and operating that farm, the “levelised cost of electricity” (lcoe) you get is lower than the marginal cost of electricity from a German coal plant. The same is true for onshore wind in Britain; Bloombergnef expects new American wind and solar to pass the threshold next year.
Banks have tightened finance for coal, too, wary of stricter regulation, stranded assets and continued pressure from green investors. In all, more than 100 financial institutions, from Crédit Agricole to Sumitomo Mitsui, have set limits on the financing of coal projects, according to the Institute for Environmental Economics and Financial Analysis.
The effects have been impressive. In Britain the share of electricity generated by coal fell from 40% in 2013 to 2% in the first half of this year; the country now burns less coal than it did when the first coal-fired power station was built in 1882. In the eu coal-fired power generation nearly halved between 2012 and 2019. In America President Donald Trump’s promise that he would save the nation’s “beautiful” coal industry proved as worthless as it was misguided. Coal-fired electricity generation was 20% lower in 2019 than in 2016, when he was elected. Peabody Energy, an American company that digs more coal than any other listed firm, warned in November that it might file for bankruptcy for the second time in five years.
This displacement needs to be speeded up and prolonged. The unique circumstances of 2020 have seen a 7% drop in coal consumption. According to a report published this week by the un and an international coalition of climate researchers, hitting the 2°C Paris target would require coal consumption to drop by the same amount every year for a decade. To hit the 1.5°C limit would require cuts of 11% year on year.
Those reductions would need to be even steeper were it not for the report’s assumption that, by 2030, a billion tonnes of carbon dioxide produced in power stations and industrial plants will be captured on site and sequestered away underground, a process known as carbon capture and storage, or ccs. At the moment the world’s ccs capacity is 4% of that. The technology could definitely be useful in steelworks and the like. Adding it to coal-fired electricity plants, though, is a pricey undertaking in which companies have very little experience. What is more, ccs has a long history as what Duncan McClaren of Lancaster University calls a “technology of prevarication”. Holding the possibility of emissions-free coal open but not realising it simply prolongs the status quo. Easier, cheaper and more definitive just to generate electricity by other means, such as renewables and nuclear.
Analysis like this has led António Gutterres, the un secretary-general, to call for coal-fired electricity to be eliminated worldwide by 2040; he says the oecd, a club of rich countries, should get to zero by 2030. That would require a huge increase in effort. Japan currently envisages getting 26% of its electricity from coal in 2030. Germany plans to go on using coal until 2038. Though American coal use has fallen, its outright abolition will be staunchly opposed by some.
That said, the fall so far has been deeper and faster than most expected. Portugal, which had planned to be coal free by 2030, now looks like hitting that target in 2021. Perhaps political pressure, industrial momentum and business opportunity can speed things up elsewhere, too.
If Mr Gutterres’s exhortation gives non-oecd countries a decade longer, it reflects the fact that many, especially in Asia, have a lot more to do. Asia is currently home to nearly 80% of coal consumption. Most of that—52% of the global total—takes place in one country: China. India, Asia’s second-biggest market, consumes less than a quarter as much.
The growth in China’s coal-fired generating capacity between 2000 and 2012 helped reshape the global economy and drive a 200% increase in Chinese gdp per person. It also nearly tripled the country’s carbon-dioxide emissions, making it the largest emitter in the world. Its effects on air quality hastened millions of deaths.
Though new installations have never stopped, concerns over pollution and a glut of generating capacity have seen their rate decrease (see chart 2). The State-owned Assets Supervision and Administration Commission of the State Council, which oversees several large coal companies, has drafted plans to reduce coal capacity by one-quarter to one-third. Meanwhile alternatives are on the rise. The government’s spending on nuclear power handily outstrips that of any other country, and it has built up a massive renewables sector. The lcoe from new coal plants in China is already higher than that for solar and onshore wind farms, according to Bloombergnef. By the middle of the decade, the firm’s analysts calculate, the lcoe of onshore wind and solar will be less than the marginal cost of operating existing coal plants (see chart 3).
Add to all this the country’s recently promulgated target of carbon neutrality by 2060 and the future of coal in China might seem to be one of rapid withering. Yet coal-plant construction shot up in 2019. And in the first five and a half months of 2020 provincial governments, keen to boost employment and economic growth, gave companies permission to add a further 17gw of new coal capacity. Various state-owned companies such as State Grid, the country’s giant utility, China Electricity Council, the coal industry’s main lobby, and some provincial governments want to see this growth sustained, even though a lot of current capacity is underutilised. One argument is that more electricity will be needed to supply demand from the electrification of heating and cars. Lauri Myllyvirta, an analyst at the Centre for Research on Energy and Clean Air, a research institute, estimates that the China Electricity Council’s statements imply a net increase in national coal capacity of 150-250gw.
Two eagerly awaited documents should reveal how much influence these pro-coal lobbies have. One is China’s 14th five-year plan, which will be published early in 2021. The other is the new “nationally determined contribution”, or ndc, required of the country under the Paris agreement—a list of its emission-reduction plans. If the five-year plan includes a near-term cap on coal capacity and the ndc calls for a peak in carbon emissions by 2025 it will signal a real turning away from coal (though perhaps not one fast enough for Mr Gutterres).
Other countries’ coal
Chinese interests in new coal plants do not stop at the country’s borders. Chinese-financed coal plants in other countries are on course to add 74gw of coal capacity between 2000 and 2033, according to Kevin Gallagher and his colleagues at Boston University. Chinese-funded foreign fossil-fuel plants—the vast majority of which burn coal—account for 314m tonnes of carbon dioxide every year. That is nearly as much as the total annual emissions from Poland. The past decade has seen Chinese companies seek new opportunities for coal-plant construction in Indonesia, Vietnam, Pakistan and Bangladesh, though Bangladesh and Vietnam have both started considering cuts in their plans for future coal capacity. If China limits coal at home, those concerns will work even harder to find growth elsewhere while the country’s miners, too, look for new markets.
In Japan a similar dynamic is at play as the coal industry and its financiers look for new opportunities. This year the country set new limits on the financing of foreign coal plants, but loopholes remain. In November development banks from around the world issued a statement that they, too, would consider ways of reducing fossil-fuel investments. But they resisted pressure from Mr Guterres and others to eliminate such investments entirely.
In India, as in China, significant new coal-fired capacity is planned on top of ambitious government targets for boosting solar power, the intermittency of which policymakers worry about. As India contemplates surging future demand for power, it has fewer alternatives to coal than China. The infrastructure for importing natural gas is underdeveloped and the fuel itself pricey; nuclear capacity is growing only slowly.
Ajay Mathur of the Energy & Resources Institute, in Delhi, argues that low utilisation rates of existing coal plants mean there is little rationale for further construction. But coal remains a political force. India’s state-owned banks have financed much of its development. Power markets give coal-fired plants fixed payments, which lessen their incentives to work flat out but also make it harder for solar power to break in. In states such as Chhattisgarh and Jharkhand jobs provided by Coal India Limited, the state-owned coal behemoth, are vital to the economy. And the government has recently authorised the development of new privately owned mines to reduce India’s imports of foreign coal. With new miners come new constituencies to advocate for coal’s future.
Similar political obstacles exist elsewhere. Fitch, a ratings agency, pointed out earlier this year that for all Indonesia’s professed desire to limit pollution, its price caps on coal for domestic power generation are designed to keep coal-fired power cheap and promote economic growth. This limits competition from other fuels. Markets rigged for coal in countries with expanding energy needs will not necessarily last all that long. But the new coal capacity they bring into being may stick around for decades.
If it can be made politically feasible, redesigning electricity markets—easing rigid power-purchase agreements in India and Indonesia, for instance—can quickly boost renewables, and the batteries which smooth out their contributions. Carbon prices, too, make coal less competitive, and if designed in such a way that their benefits are visible to all—perhaps as dividends—they may offer a counterbalance to the concentrated political power of coal lobbies.
Perhaps most important, though, is support for those who will suffer from coal’s demise. “If you’ve got 30 years, one can plan a phase-down,” says Mr Mathur. “If you’ve got ten years, it is shutdowns and large financial transfers.” Mine closures must include support and retraining for affected workers. And there is scope for more creative assistance from the West—which has an interest in reducing coal emissions wherever they come from. The private arm of the Inter-American Development Bank recently helped a Chilean developer replace coal assets with wind turbines by means of a low-interest loan. The Sierra Club, Carbon Tracker and Rocky Mountain Institute, three green groups, suggest paying for reverse auctions in which developing-country coal-plant owners bid for debt-forgiveness to retire their coal stations early in favour of clean power. Only if alternatives are made attractive to incumbents can coal be crushed as speedily and completely as the world requires. ■
Copyright © The Economist Newspaper Limited 2020. All rights reserved.
The end of coal? Why investors aren’t buying the myth of the industry’s ‘renaissance’
The Institute of Energy Economics and Financial Analysis says ‘the financial markets are no longer really differentiating between coking coal and thermal coal’. Photograph: Jessica Hromas/The Guardian
Three years ago, pictures of bulk carriers queued off the coast of Mackay in central Queensland were framed as evidence of a “renaissance” in the coal industry.
There were more than 70 coal ships in the offshore gridlock in December 2017. This year there are just 12 waiting – equalling a record low mark set at the height of the coronavirus pandemic.
At the world’s biggest coal export port in Newcastle, no China-bound ships are waiting or scheduled to load before Christmas. More than 50 ships carrying Australian coal are reportedly waiting off the Chinese coast.
In the face of falling coal prices and volumes, the industry and governments have remained bullish about coal’s long-term prospects. They say twin pressures of the pandemic slowdown and China’s ban on Australian coal will ultimately pass.
In an apparent show of faith, the Queensland government took a 9.9% stake in the float of Dalrymple Bay Infrastructure (DBI) – one of two large terminals in Mackay, the main hub for exports from the Bowen Basin. The investment was welcomed by the resources sector as “a clear vote of confidence … in the role of resources in Queensland’s Covid-19 recovery and economic growth for decades to come”.
When the stocks hit the market, DBI tanked, down 16%.
DBI was launched on the Australian stock exchange this week with government backing and the broader market surging. It was the second biggest Australian IPO this year (the largest, tech company Nuix, gained 63% on debut last week). DBI also promised investors a handsome 7% dividend.
When the stocks hit the market, DBI tanked, down 16%. It gained no ground the following day. Investors were not buying the pitch that coal has a rosy future.
“It’s a pivotal moment,” says Tim Buckley, an energy markets expert at the Institute of Energy Economics and Financial Analysis.
“The financial markets do move so much faster than the real world, they are all about constantly reevaluating the risk-return and growth prospects.
“There’s no long-term growth prospect at all for the [coal] industry. It’s like trying to catch a falling knife.”
The bleak outlook
Australia’s biggest super fund, AustralianSuper, has committed to hitting net zero emissions across its $200bn investment portfolio by 2050 – but has not specifically ruled out investing in coal projects.
Nonetheless, its chief executive, Ian Silk, seems less than enthusiastic about the idea.
“The economic outlook for coal stocks generally is incredibly bleak, for obvious reasons,” he says.
He says Aussie would approach any particular coal project on its financial merits.
“But it’s pretty plain by the way we’re so underweight coal that that’s not an attractive sector,” he says.
Silk is not alone. Institutional investors – the big pension funds and other piles of money that provide much of the capital businesses need to operate – have increasingly turned away from coal and other fossil fuels.
Norway’s Government Pension Fund Global, which at US$1.2tn is so big it holds about 1.5% of all the shares in listed companies in the world, has strict rules forbidding it from investing in companies that produce more than 20m tonnes of thermal coal a year or produce power of more than 10,000MW a year from burning coal.
As a result, in May it excluded from investment two big multinationals that mine coal in Australia, Glencore and Anglo American, as well as Australian power company AGL Energy.
It also put BHP on notice that it could dump its stake in the Big Australian if it didn’t get out of thermal coal.
In Australia, the big banks have displayed an increasing unwillingness to lend to coal, with ANZ in October saying it would not write new loans to businesses with more than 10% exposure to thermal coal and existing customers with more than 50% exposure would need to show it “specific, time bound and public diversification strategies” to continue receiving the bank’s cash.
The harder line from banks followed warnings from their regulator, the Australian Prudential Regulation Authority, that they needed to consider climate risks when making decisions.
Apra member Geoff Summerhayes laid down the regulator’s position in a speech in 2017 that was met with howls of dismay and derision by some.
This week, he said the criticism “was good impetus for me to actually go harder, because it’s very much a financial risk with real prudential implications”.
The Queensland bellwether
It is easy to blame the failure of Australian coal prospects to re-emerge from the pandemic on the situation in China. However, there are growing signals the industry is heading into its final bust cycle.
A few days before the Dalrymple Bay terminal was floated, the largest coal producer in Australia and the western world, Glencore, released its annual investor update and – critically – announced new plans for a “managed decline of its coal business” and net-zero emissions by 2050.
While those plans are ultimately long-term (and also play to the company’s strategic interest by seeking to keep prices at viable levels by constraining supply) they also show the company expects volumes to drop substantially – up to 20% – in the next few years, compared to previous projections.
Coal is also on the nose at Australia’s two big mining companies, BHP and Rio Tinto.
The same investor update last year envisaged Glencore would produce 140m tonnes of coal in 2022. Now the company only expects to mine 115m tonnes that year. It might consider mine-life extension projects but has no plans to develop new coal mines.
Coal is also on the nose at Australia’s two big mining companies, BHP and Rio Tinto, which have turned away from the black rock and towards red ones as the iron ore price continues to soar.
Rio Tinto sold its last Australian coal mine in 2018 and, under pressure from investors, BHP has promised to get out of thermal coal – burned in power plants – within two years but so far has found no buyers.
Of particular concern to miners in Queensland is the way financial markets have treated metallurgical (or coking) coal, which is used in steelmaking. More than 80% of the exports from Dalrymple Bay are metallurgical coal.
In the days before the DBI float, company chief executive Anthony Timbrell told the Australian Financial Review it would seek to emphasise the difference between metallurgical and thermal (energy producing) coal.
“I guess it’s our job to draw out that story and remind people of the complexity,” Timbrell said.
Thermal coal is the primary target of environmental activists; while metallurgical coal is less susceptible in the immediate-term to a global energy pivot towards renewables.
BHP has also been keen to draw the distinction, which is in its financial interests as metallurgical coal attracts a higher price than thermal coal.
However, as excitement builds around the prospect of (as yet, not commercialised) steelmaking alternatives like green hydrogen, the financial markets increasingly appear to be making little differentiation between the classes of coal.
Buckley points to a graph comparing the US and Australian metallurgical coal producer Coronado with Australian company Whitehaven, which largely mines thermal coal.
Since Coronado was listed in 2018, both Coronado and Whitehaven’s shares have dived almost in harmony by about 65%. The All Ordinaries is up about 20% over the same period.
“The financial markets are no longer really differentiating between coking coal and thermal coal,” Buckley said.
“Dalrymple Bay is a really interesting bellwether for Queensland. Having already been priced down, having failed to get institutional support, taxpayers effectively did a bailout.
“The vendor (Brookfield Asset Management) is the most successful investor in energy infrastructure, and you don’t buy from the most successful energy investor in the world and think you’re getting a bargain.
“This isn’t a resources sector problem either, this is a coal problem. The Australian resource sector is having the best year in history, iron ore prices are at phenomenal highs. It’s the fossil fuel sector that’s on its knees.”
The end of the line
The coal company run by John Canavan, the brother of Queensland senator Matt Canavan, went under earlier this month.
The company, ICRA Rolleston, is a junior joint venture partner with Glencore in the Rolleston thermal coal mine in Queensland. Glencore will continue to operate the mine but a court case finalised last month showed how the collapse in the coal price had turned the mine into a loss-making venture.
John Canavan’s share of the mine’s costs were about $14m more than sales revenue in August. Glencore expected another $4m shortfall by the end of the year.
DBI warned about a series of “risks” that included its customers collapsing due to low coal prices, or long-term decline in global coal demand.
The Queensland Exploration Council (an offshoot of the Resources Council) this week released a report card showing some growth in spending by coal speculators during 2019-20 and said there was “definitely a feeling of growth and optimism in the sector”. In the detail of its report, though, for the first time in four years the QEC downgraded its view on coal prices, saying these has become “cause for concern”.
In its prospectus for potential investors, DBI warned about a series of “risks” that included its customers collapsing due to low coal prices, or long-term decline in global coal demand.
Its most significant new investor, the Queensland government, released a study in September that stated “there is a substantial degree of uncertainty” about assumptions used to underpin long-term market projections, including about the price of coking coal.
“Queensland Treasury’s analysis … highlights that Queensland’s future coal demand will continue to be primarily linked to key economies in north-east and south-east Asia. In particular, the future demand for Queensland’s metallurgical coal likely hinges on demand from the world’s two largest coal consumers, China and India.”
DBI’s warnings included that ongoing political tensions between Australia and China could ultimately result in a decline in coal exports from the port.
“Demand for metallurgical coal … or coal generally may reduce over a period of time due to a variety of reasons, including reduced demand from key coal export markets, such as China, Japan, Taiwan, South Korean and India.”
In addition to China’s import restrictions, China, Japan and South Korea – Australia’s three largest coal customers – each announced aggressive pivots towards net zero emissions this year.
Adding to DBI’s troubles is the nature of its business – where contracts with exporters are regulated by a competition authority. The port’s capacity is fully allocated. Unable to raise prices or attract new customers, its pitch to investors has been about expanding its capacity to grow the business, even as shipments are being shunned by China, export volumes contract, coal companies collapse and other Queensland ports face severe debt problems.
Of those terminals, Wiggins Island at Gladstone and the Abbot Point terminal near Bowen, owned by Adani, have both been operating at well below design capacity for all of this decade, a point Buckley and others say shows any expansion of Dalrymple Bay is not viable.
Abbot Point – where Adani’s debts are estimated in excess of $1.5bn – typically has a queue of about three coal ships. Earlier this week, there were no ships waiting to enter the port.