Current Industry Challenges
The U.S. coal industry faces significant competitive challenges. Global demand for metallurgical coal used in steelmaking has declined in 2012 in large part due to macro-economic conditions. Demand for thermal coal used to generate electricity has decreased substantially in 2012 due to sustained low natural gas prices, as well as the unseasonably warm 2011-2012 winter across the U.S. In addition, the industry faces burdensome environmental and governmental regulations, which have impacted demand for coal and increased costs.
Decreased Demand for Coal
The demand for metallurgical coal is dependent on the strength of the global economy and, in particular, on steel production in geographies such as China and India, as well as Europe, Brazil and the U.S. In response to the recent global economic downturn and distressed international financial markets, the demand for and the price of metallurgical coal have declined.
Lower Metallurgical Coal Pricing
Over the last several years, coal’s share of the U.S. energy market and prices for thermal coal have both markedly declined. Vast resources of natural gas have been unlocked through the new discovery of shale deposits and technological advancements in drilling, causing the price of natural gas in the U.S. to fall. Coal’s share of total U.S. electricity generation, for example, declined from 48.3% in 2008 to 37.4% in 2012. These factors, in turn, caused coal inventories at U.S. electricity producers to expand to over 184 million tons by the end of 2012. Therefore, the coal industry as a whole has been forced to reduce production by approximately 80 million tons of thermal coal in 2012. As a result, coal producers have had no choice but to close or idle mines and lay-off workers.
Lower Thermal Coal Pricing
Henry Hub Natural Gas Prices
The regulatory environment, both with respect to customers who use coal and the operation of coal mining companies, has become increasingly burdensome. Specifically, the regulation of electricity generators has made it increasingly difficult for U.S. companies to use coal as an energy source and may lead to a further reduction in the amount of coal consumed by the electricity generation industry. At the same time, coal producers are faced with dramatically increasing costs to comply with environmental laws and other governmental regulations.
Government Regulations Impacting Coal Customers and Coal Industry
1. Regulation of Coal Mining
Federal and state regulatory authorities impose obligations on the coal mining industry in a wide array of areas, including employee health and safety, permitting and licensing requirements, environmental protection, the reclamation and restoration of mining properties after mining has been completed, surface subsidence from underground mining and the effect of mining on surface and groundwater quality and availability.
Over the past several years, new regulations and a multitude of citizen lawsuits brought by non-governmental organizations have dramatically increased the coal mining industry’s environmental compliance costs.
In particular, regulatory agencies have been increasingly focused on the effects of surface coal mining on the environment, which has resulted in more rigorous permitting requirements and enforcement efforts.
2. Regulation of Coal Customers
As the regulation of greenhouse gases and other air emissions imposed on power plants has become more rigorous, electricity generators are facing increasing difficulties in obtaining permits to build and operate coal-fueled power plants and higher costs to comply with the permits received at such facilities.
The United States Environmental Protection Agency (EPA) has recently finalized two rules to constrain certain air emissions from power plants. While one of the rules (Cross-State Air Pollution Rule) was recently vacated by a Federal Court, the uncertainty about the implementation and timing of EPA initiatives over the next several years threatens to significantly impact all coal-fueled electricity generation units that are not equipped with pollution control equipment. In addition, the EPA has proposed performance standards for certain new power plants that would significantly restrict the permissible emissions of carbon dioxide, a by-product of burning coal, and in doing so severely limit the future development of coal-fueled electricity.
Electricity generators are also being incentivized to use alternative energy sources. Many states have implemented renewable portfolio standards, which generally mandate that a specified percentage of electricity sales in the state be attributable to renewable energy sources. Congress has considered imposing a similar federal mandate.
The combination of these incentives and the cost of complying with regulations may cause electricity generators to close existing coal-fueled facilities, reduce construction of new facilities or further switch from coal to alternative fuels like natural gas.