Can The Coal Market Make a Comeback?

The coal market has experienced many changes in recent years, resulting in declining US coal production and employment.  President Trump believes he can improve the state of the market by reducing the environmental regulations set by his predecessor, despite the external factors that influence the demand for coal – namely decreased demand for electricity, cheap natural gas, and renewable energy growth. So, can coal make a comeback? Read on to find out if there’s hope for coal and what factors will influence its future.

A report published by Columbia University’s Center on Global Energy Policy says “no” (download full report here).  Report authors Trevor Houser, Jason Bordoff, and Peter Marsters examine the coal industry’s collapse and the potential effect of President Trump’s executive order rescinding Obama era environmental regulations.  What follows is a summary of the report highlighting key takeaways.

In 2011, as the United States economy was recovering from the Great Recession, the coal industry was experiencing growth (>5% per year) that led US mining companies to have positive expectations for the upcoming decade.  Just five years later, the coal market collapsed; forcing large coal companies, such as Peabody, Arch, and Alpha into bankruptcy (including Cloud Peak, 4 largest coal companies market value of $33 billion in March 2011 down to $150 million in May 2016).  By 2016, US coal production had fallen by 27 percent, domestic demand declined by 30 percent, and exports were continuously decreasing.

What Caused The Decline? 

The cause for this sudden dramatic decline in the demand for coal can be blamed on the following (numbers in parentheses represent percentage attributable to drop in coal production):

• Electricity demand (26%) – Not only did the Great Recession diminish electricity consumption, but improvements in technology and building efficiency have inhibited demand growth. Nearly all coal consumed in the US (93%) is for power generation.

• Natural Gas (49%) – US companies have gained access to previously inaccessible sources of oil and gas (shale gas and tight oil), with projections indicating an increase in production of natural gas by 40 percent by 2030. Increased production leads to decreasing prices.

• Renewable Energy (18%) – Cost reductions and federal tax incentives have had a positive impact on the production of wind and solar generation. The average cost of onshore wind generation declined 36 percent between 2008 and 2016. Solar PV module prices fell 85 percent between 2008 and 2016, and solar generation expanded more than 40-fold.

US coal companies were also negatively affected by foreign demand.  After years of heavy reliance on coal for production of building materials, China began the move away from the heavy-industrial sector to more high-end manufacturing and service sector.  Their demand for coal fell, creating downward pressure on the world price.  For US companies, lower prices and fewer exports meant a production revenue loss of $19.4 billion between 2011 and 2016.

What Has Been the Effect Of Environmental Regulations?

While market forces were the most prominent driving force in the market collapse, environmental regulations set by the federal government played a role.  The Obama administration implemented ten different regulations relating directly to the production of coal, with only four taking effect before 2016.  The goals of the regulations were to hold companies accountable for their environmental impact, thus resulting in higher costs of production and the retirement of some coal power plants.  These regulations are estimated to account for 3.5 percent of the overall 33 percent decline in US coal production.

What About the Jobs?

In the 2016 election, Trump promised coal country that he would lighten the burden of these environmental regulations and get them their jobs back (there were 130,000 Americans working in coal in 2011, down to just 70,000 today).

Trump has set ambitious goals to bring growth back to the coal market, beginning with freezing all Environmental Protection Agency regulations still in review.  On March 28, he signed an executive order for the EPA to review the Clean Power Plan, which sets the CO2 standards for power generation and methane regulations for oil and gas production (as well as lifts the moratorium on federal coal leasing).

How Effective Will This Be?

While the effect of Trump’s administration plans will take time to show noticeable change in the coal market, short term US domestic coal consumption could see an increase.  Domestic coal consumption has a direct relationship with the price of natural gas.  As prices of natural gas increase, coal becomes more competitive.  After an abnormally warm summer and an increase in national heating degree days in early December 2016, residential and commercial natural gas demand increased, pushing up natural gas prices.  “On average, Q1 natural gas prices at Henry Hub were 52 percent above the same period in 2016 and among power plants tracked by GenScape, coal consumption was 7 percent higher.  When nationwide first quarter coal demand numbers are released from the Mine Safety and Health Administration in May, they will likely show a modest production recovery.”

Another considerable factor to market improvement is the global supply.  In an effort to keep their coal companies from experiencing bankruptcy, China’s government intervened by setting caps on number of days allowed for work, limiting production.  A cold winter and shortage of supply led China to demand more imports, resulting in an increase in US coal exports.  Consequently, US coal production increased during the last quarter of 2016, followed by the recreation of 1,459 jobs.

However, these improvements are primarily due to short term energy market dynamics.  Trump’s executive order and goals to increase coal production seek long term results.  There is difficulty in analyzing Trump’s policy impacts due to the price of natural gas being a strong determining factor on demand of coal.  In the scenario that natural gas prices rise, there will be an increase in US coal consumption.  But, due to coal’s sensitivity to natural gas prices and falling renewable energy costs, there is much uncertainty.

Despite Trump’s efforts to stimulate the coal market, energy prices still hold most of the weight in determining demand.  As the costs of renewables continue to decrease, natural gas and oil production increase, and state level policies encourage the accelerated adoption of renewables/batteries/DERs, the likelihood of coal making a comeback to prerecession levels is slim.