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Replacing Coal, part 1: 'Great Depression' grips pockets of Mountain State

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Replacing Coal, part 1: 'Great Depression' grips pockets of Mountain State

This article is partone in a three-part series stemming from discussions around "Building aResilient West Virginia," the theme of the National Energy Conference 2016sponsored by the West Virginia University College of Law.Part two is here.

Largely the result of a wounded coal sector, there arecounties in West Virginia where more than one-third of the citizens are out ofwork.

The situation — the equivalent of a localized GreatDepression, according to one economist — has hit hardest in the CentralAppalachia coalfields. The region has long depended on coal and as its seamshave gotten thinner and more difficult to reach, the industry has also beenforced to fight anemic domestic and global demand in the face of low naturalgas prices, government regulations and a global economic stall.

Some of the largest mines in the country such as andArch Coal Inc.'soperations in Wyoming are also just beginning to large-scale layoff to its employees.However, for years, places in West Virginia and Kentucky have watched as minersare laid off by the hundreds in a region with few other options.

A recent SNL Energy analysis showed most of the job losses that occurred inthe coal sector have occurred in a "ground zero" of sorts, a narrowband of 16 counties that extend across eastern Kentucky and southern WestVirginia. Another analysis showed coal job losses rapidly in 2015, with the industryshedding nearly 35% of its employment since a near-term peak at the end of 2011.

'Got to have hope'

At the recent National Energy Conference 2016, West VirginiaUniversity's John D. Rockefeller IV School of Policy and Politics convened ahost of guests to discuss the policy and programs that could build a resilienteconomy in the face of coal's bleak future.

Retired Sen. Jay Rockefeller, D-W.Va., told S&P GlobalMarket Intelligence that the current political environment could stymieprogress for years. He encouraged coal miners to keep their heads up as thestate endures the effects of the sector's collapse.

Retired Sen. Jay Rockefeller, D-W.Va., speaks with West Virginia Del. Barbara Fleischauer, D-Monongalia, at a recent energy conference. Source: Taylor Kuykendall

"You just got to have hope," Rockefeller said."There's no reason for you to. I can't prove that to you, but thealternative — just getting depressed and disappearing inside of yourself isn'tgoing to help you either."

Rockefeller insisted in a keynote speech at the conferencethings are not going to get any better for the coal sector, regardless ofwhether the country votes a Republican or Democrat into the White House. AGoldman Sachs report earlier in the year declared the fate of thermal coal"irreversible" and an SNL Energy showed 1 in 4 tons of the coalrecently produced in the U.S. comes from a company recently filing bankruptcy.

Instead of clinging to the hope that a new president canreverse the course of today's energy market, Rockefeller said it is time forthe state to own itschallenges and find the will and leadership to do what needs to be done.

"Nothing is going to change in the big picture. …That's our challenge," Rockefeller said. "We have to boldly face therealities of a transition from where we are now to where we believe we wouldlike to be. We've got to figure that out."

Rockefeller said the state has been "socoal-dominated" in its economy, psychology and politics that people areafraid to speak up, but now is the time to "take control of the future."

"As we go through this process, let's not go through itgrimly. … What you do is you surround yourself with hope, which is the mostimportant word in the English language as far as I'm concerned,"Rockefeller said.

'Collapse of aneconomy'

Joyce McConnell, provost and vice president for academicaffairs, opened the conference with a call to focus on three pillars of policyto address coal's downturn: education, health and prosperity. She said thecollege has a "moralobligation" to examine opportunities to improve energy andsustainability.

"We knew in 2008 the signs were already on the wallabout the decline of the coal industry and the need to transition our economyfrom one purely based on extraction — whether it's coal or gas or oil or timber— to one that's an economy that is not only knowledge-based, but isinnovation-based," McConnell said.

She added that "we're actually witness to the collapseof an economy" in West Virginia's coal-dependent communities.

"What we talk about today and discover today won'thappen overnight," McConnell said. "It takes time to diversify aneconomy and we have to think about the near-term, the middle-term and thefar-term. That's the human reality."

The situation is dire. John Deskins, director of the WestVirginia University Bureau of Business and Economic Research, said hisorganization is working on the latest economic forecast and the next issue isabout to be even less optimistic for coal than before. In 2008, Deskins noted,West Virginia produced 150 million to 160 million tons of coal. In 2016, heforecasts production could go as a low as 80 million tons.

"Statewide mine outputduring the first quarter of 2016 will likely come in at its lowest level indecades and could be the lowest total for quarterly production outside of astrike episode since the 1930s," said Brian Lego, BBER research assistantprofessor, in a news release from the bureau's latest state business index."Environmental policy, falling export demand, warmer-than-normal winterweather and increased utilization of natural gas by electric utilities have allcombined to weigh heavily on coal production."

The decline in coalproduction has also created a sizable hole in the state's economy due to lowerseverance tax collections. Despite the budget shortfall, some West Virginialegislators recently attempted to pass a bill that would have significantlycut the state's coal tax burden. While a smaller, additional tax was allowed toexpire, the broader cut was shelved by lawmakers for further study.

Deskins said the popular political notion in the state thata new presidential administration could reverse coal's fate is "not at alltrue." Among coal's challenges are low natural gas prices, and even inWest Virginia, the gas and oil sector is projected to soon surpass coal inshare of the gross domestic product.

Most of the growth in natural gas has occurred in thenorthern part of the state as the Marcellus shale has caused gas production toswell. Coal production in the northern part of the state has remainedrelatively flat. Meanwhile, the southern coalfields have experienced a dramaticdrop in coal production while simultaneously receiving little to no directbenefit from the state's boom in shale gas production.

Deskins said that though the pain is largely concentrated incertain pockets of the state, his office has officially declared West Virginiato be in a recession.

"We have some counties in West Virginia that are in aGreat Depression," Deskins said. "We have a few places in our statethat have lost one-third of their jobs, just over the last few years. … That'sabout what the job loss was in the 1930s during the actual Great Depression."

'Fait accompli' —issues stacked against coal

AppalachianPower Co. President and COO Charles Patton said discussions aroundclimate policy and mandated technology must be sensitive to the notion that thecost will be passed on to the consumer. At Appalachian Power, a subsidiary ofAmerican Electric Power Co.Inc. primarily relying on coal generation, Patton said about 25% ofcustomers are delinquent on their power bills.

Still, he said, the writing is on the wall for change in theelectric sector.

"Once you get through the political morass, at the endof the day, most Americans believe there is something going on and we need totake steps to address it," Patton said. "That belief is commonknowledge in business. … The fact that technology has driven downthe cost of renewables to such a point and there is sufficient capacity outthere, all utilities are beginning to change their view of the future. While Idon't know what's going to happen with the Clean Power Plan, I think it is afait accompli that something is going to happen as it is related to climate."

That is why Appalachian Power is planning huge shifts in itsgeneration portfolio as it moves toward natural gas and renewable electricitygeneration sources. He said that while utilities cannot afford to be"single-issue" and rush to build out fully renewable portfolios, onceshunned or dismissed generation sources are increasingly being embraced byutilities on cost factors.

"Coal will continue to be a significant part ofAppalachian Power Co. going forward — that's with or without the Clean PowerPlan — it will continue to be a significant part," Patton said. "It'sgoing to be less than it has been historically."

Early data from the U.S. Mine Safety and Health Administrationsuggests that in the first quarter of 2016, coal production has continued todrop. Of a handful of mines reporting data early, first-quarter was down 9.4% yearover year in Central Appalachia. U.S. coal rail traffic data showed that forthe week ending April 2, U.S. coal rail deliveries had plunged 39.2% compared to the year-agoperiod, suggesting a significant drop in utility coal burn.

After passing monthly coal generation for the first time inearly 2015, natural gas generation has been the lead fuel for U.S. electricitygeneration for the past several months.

Patton said Appalachian Power currently gets about 74% ofelectricity from coal generation, a figure expected to drop to 53% by 2025. Hesaid despite having some of the "best coal plants in the nation," thecompany's coal portfolio still cannot out-dispatch natural gas.

Patton said there is not much hope for coal, particularly workingon the assumption that natural gas prices are projected to remain under$5/MMBtu for the next several years.

"You could not build a coal plant that meets existingregulations today that can compete with $5 gas," Patton added. "Itjust cannot happen. The opportunity for new coal [generation] … is just notthere."