Dean Barber

Down But Not Out

In Corporate Site Selection and Economic Development, Energy on June 8, 2014 at 5:27 am

Well before I first went down into a coal mine, I had this fascination with how coal has shaped lives and communities.

Having family roots in Appalachia, I have seen how coal transforms a place and people, both good and bad.

On the good side, it has historically provided for very good wages to people willing to do the work in typically economically depressed areas, while providing the United States with a cheap and reliable source of energy.

On the bad side, it is dangerous work that has cost and shortened lives. In some places, it has scarred the land and has generally created some environmental problems both on a local and national level and even a world-wide basis.

Because of a subscribed-to belief that climate change is happening and in part due to the burning of carbon fuels, coal-fired plants have faced increased regulation during the Obama administration. Not surprisingly, the coal industry sees this as an assault on its very existence.

 A “war on coal” is a common phrase used within the industry and coal communities in Appalachia by people who are utterly convinced that the current administration is dead set on making coal an obsolete fuel.

A Further Clampdown

President Obama only further confirmed that belief last week with proposed a new rule designed to further clampdown on carbon dioxide emissions from American power plants.

The Environmental Protection Agency proposal calls for reductions in carbon dioxide pollutants of 30 percent by 2030 from 2005 levels to stem climate change.

And while the newly proposed measure is certainly no shot in the arm for coal, neither is it a fatal blow. The truth that even before the new EPA proposal, coal-fired power plants in the U.S. have been under significant economic pressure because of low natural gas prices and slow electricity demand growth. Add to that further environmental regulation and you got yourself one very unhappy industry.

The U.S. had 1,308 coal power plants at the end of 2012. Their average age is 42 years, while 11 percent have been operating for more than 60 years. To ensure a reliable supply of electricity while meeting current environmental regulations, utilities have been retiring the older, inefficient plants increasing  the output of those that remain online.

If an average coal plant is currently operating at about 50 percent of capacity, once the older plants retire, the remaining units may increase capacity to about 55 percent, Brandon Blossman, an analyst at Houston-based Tudor Pickering Holt & Co., told Bloomberg.

“You’ll run the balance of the fleet harder,” he said.

Coal’s Share Will Slide

Under the new rules, the U.S. will still burn between 616 million and 636 million tons of coal for power in 2020, compared with 844 million tons if the restrictions did not into effect, a reduction of 25 to 27 percent, according to the EPA.

Coal’s share of the country’s power generation, now about 40 percent, is estimated to fall to about 33 percent in 2020 and 30 to 31 percent in 2030 under the proposed curbs, compared with an increase to 41 percent under existing rules, the EPA’s figures show.

The bottom line is that while demand for coal will be further stifled, which is bound to hurt certain companies and communities dearly, the latest EPA proposal is not the death knell of coal as portrayed by some industry advocates.

Not surprisingly, the National Mining Association said the EPA proposal will increase power prices and threaten energy grid reliability.

“These regulations, if finalized, would be a loss for American consumers, manufacturers and businesses nationwide, but especially for those in states that rely on low cost electricity from coal,” the Washington-based industry group said.

Higher Energy Costs?

Jay Timmons, president and CEO of the National Association of Manufacturers, said the EPA proposal could eliminate any U.S. competitive advantage by “removing reliable and abundant sources of energy from our nation’s energy mix.”

The American Chemistry Council repeated the competitiveness argument:  “As we begin our review of EPA’s proposal, we remain concerned that the regulations could lead to higher energy prices in certain parts of the country, a scenario that would make it more difficult for manufacturers in those states to compete abroad and grow and hire in the U.S.”

As one corporate site selection and economic development consulting, the idea that energy prices could rise in certain parts of the country in relation to others has me most concerned. Could that create even greater discrepancies in the cost of operations between states and regions? I don’t know the answer to that yet, but that will be something that I will be watching closely.

The EPA, by the way, predicts that overall energy costs will actually go down because the proposed regulatory changes, based on a pretty simple market theory that less demand for coal will mean for lower prices.

It is interesting to note that the ACA did throw a bone to the Obama administration by saying this: “We welcome the flexibility the Administration gave to states in designing compliance plans, and urge states to carefully assess how specific programs would affect energy costs, diversity and reliability.” 

A Question of Fairness

Now from my admittedly short-shrift analysis, it would appear that Texas, where I so happen to live, would have to share more of the brunt than other states if the proposed EPA rule goes into effect.

Texas alone will account for a quarter of the total U.S. reductions, with a cut of 39 percent required over the next 15 years if the proposed rule is adopted, whereas coal-dependent states like West Virginia and Kentucky face requirements of less than half that.

The EPA calculated the goals based a complex formula including existing emissions and availability of renewable power. States would be free to choose their own approaches as long as they achieve the goal.

While the proposed overall cut in Texas is considerable, a natural-gas production boom and large increases in wind energy (Texas is the nation’s top wind-power producer) has meant for a weaning off of coal. But that overall trend is happening in other states as well.

Energy Future Holdings Corp., the largest power generator in Texas, filed for bankruptcy on April 29 after a collapse in gas prices cut into revenue at the company’s coal-fired and nuclear power plants.

So there will certainly be winners and losers as we continue to transition away from coal, but the coal industry is not nor will be dead by any means. Coal remains the world’s second largest source of energy, and the U.S. is one of the top exporters of it in the world.

And somehow, someway, I believe that we will continue to use coal as a fuel source in the future in this country, because we will see an emergence of proven clean coal technologies. Too much is at stake not to go that route, even with our natural gas boom.

Controversy is not new to coal. King Edward I banned its use in London in 1306 because of heavy smoke from its fires. Centuries later coal fired the industrial revolution and shrouded London, a resident of that city in 1905 coined the word “smog.”

Personal Observations

Back in the 1980s, as a young reporter with The Birmingham News, I partnered with future Pulitzer-prize winner Rick Bragg in writing about the coal industry in Alabama. If I recall correctly, we wrote a series of stories that won some awards. I think a got plaque that I would subsequently use for a vegetable cutting board.

Far more important than any award was what we learned and reported, as we were able to go down into the mines and watch and talk to the miners at work. When we came back up to the surface via a long elevator ride, our faces were blackened just like the miners. But in the end, we were visitors into their world, albeit we told their stories.

And in the process, we learned how important the coal industry was to the miners and their families and to entire communities that were dependent upon it.

I came away with a lot of respect for coal miners. They are another breed entirely, where race and class plays no part. There’s brotherhood down in the mines and a certain closeness to mining communities.

So I cannot subscribe to the notion that coal is best left in the ground. I believe there is a future role for it and that emerging technologies to essentially clean it up will make it so. This is an area where we need a big R&D push. I hope it will happen and that the coal miners, those who remain, stay safe.

I’ll see you down the road. 

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

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