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Coal magnate governor asks Trump for tax credit worth millions to his customers

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West Virginia Gov. Jim Justice says he has met with Donald Trump and that the president is interested in an idea to offer a tax incentive to utilities that burn Northern Appalachia and Central Appalachia coal in the interest of homeland security.

Source: Associated Press

West Virginia Gov. Jim Justice is asking President Donald Trump for a federal subsidy that would offer billions of dollars to utility customers for buying coal from Appalachian producers, which could potentially include the governor's family coal business.

According to fuel contract data collected by the U.S. Energy Information Administration, and assuming no cap or other caveats on Justice's proposed $15/ton subsidy, the plan would have cost taxpayers about $1.73 billion in 2016. As recently as 2011, when Central Appalachia and Northern Appalachia coal production was higher, the proposed subsidy would have totaled $3.23 billion.

Justice, a billionaire who made his fortune on coal, agriculture and other enterprises, hinted he had an idea that would help out coal producers during a Trump rally in West Virginia in which the governor switched parties from Democrat to Republican. His office officially announced a proposal for the federal government to pay power plants $15 for every ton of coal purchased from Central Appalachia or Northern Appalachia producers on Aug. 11. The governor said the subsidy, which he estimates would cost $4.5 billion annually, would serve as a homeland security incentive that would protect the eastern power grid. Justice's cost projections appear to be based on a much higher tonnage than has been reported by companies from the Appalachian producers in recent years.

An S&P Global Market Intelligence analysis of federal data shows, based on 2016 deliveries of 588,000 tons of coal from mines owned by James C Justice Companies Inc, that such a subsidy could have netted at least $8.8 million for utilities buying coal from the governor's operations. As recently as 2014, when coal demand was higher, those same mines delivered 1.43 million tons of coal to U.S. power units, a level that would have earned plants buying coal from Justice a $21.4 million federal subsidy under his plan.

The data includes only coal delivered to utilities from Justice's mines that were reported as being sourced from James C Justice Companies. After his election, Justice announced his coal operations would be managed by other family members. Justice has not specified whether his family businesses would benefit from the proposed subsidy. The governor's communication team did not respond to several requests for information on the proposal or potential benefits to Justice's family coal operations.

He also claims the subsidy would create many coal jobs for Appalachian states, where coal is often out-competed by other regions and cheap natural gas. A pending study of grid reliability from the U.S. Department of Energy is widely expected to tout coal's role in forming a resilient electricity grid.

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"All it is going to take to shut the power grid down to the entire Eastern half of the country is a bomb being placed at a key natural gas pipeline or on a major highway artery to the West," Justice said in an Aug. 11 news release. "Think about what would happen if the power grid was shutdown for 60 to 90 days in the dead of winter. We could lose hundreds of thousands of people."

Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin, said there are real issues with a grid that is more vulnerable than many believe but that Justice's plan was a "silly" and "expensive" way to try to solve grid reliability concerns.

"It's not really logical or consistent to do this for grid reliability," Webber said. "The grid is already prepared for different failures."

He dismissed the idea that increasing natural gas was hurting diversity of power sources and suggested it was actually doing the opposite, after coal's long domination as a source of the nation's energy. EIA data shows in 2016 that coal accounted for about 94% of West Virginia's power.

Webber added that natural gas plants tend to have more than one source of fuel as a backup to failure. He said a better investment in reliability would target transmission infrastructure, which is often a more likely source of widespread outages.

While Justice noted a "lot has to fall in line" to make his plan work, he said Trump and his staff listened to the plan during two White House meetings. A White House spokeswoman told S&P Global Market Intelligence they would report if there are any announcements to be made in regard to the proposal.

Joe Aldina, director of U.S. coal at PIRA Energy, an analytics and forecasting unit of S&P Global Platts, said such a credit would help Appalachia compete with Illinois Basin coal, but would likely not move the needle much in terms of competing with natural gas. He said environmental concerns about building coal power plants and an oversupply situation in power markets would likely prevent the proposal from having much effect.

"There are some legitimate questions about the security of supply and capacity and how do coal units survive, but I don't think this is the fix for that," Aldina said of Justice's plan. "I don't think this changes the equation for building new coal-fired units."

If a rail line was attacked, Aldina noted, coal could be rerouted from other sources or natural gas stores could be tapped while the rail was rebuilt. The most recent EIA data shows that bituminous coal burning units, which are primarily eastern U.S. operations, had an average of 76 days worth of coal supply stored on site in May.

Webber said a "clever terrorist" could go after key natural gas hubs and severely disrupt the flow of natural gas in the eastern U.S., but he said the same applied to rail lines hauling coal, particularly to the South.

"If you were a really good terrorist, you wouldn't go after gas, you'd go after the grid," Webber said. "There is a vulnerability, that's not such a stretch, but that vulnerability is not specific to natural gas in any way."

Western coal producers Peabody Energy Corp. and Cloud Peak Energy Inc., companies that would not directly benefit from Justice's proposal, declined to comment. A National Mining Association spokesman said the group has never raised or heard members discuss such a proposal and could not comment.

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West Virginia Gov. Jim Justice sits alongside Murray Energy CEO Robert Murray during a press conference in which he vetoed the Republican-led legislature's budget in April 2017. Justice, then a Democrat, has since switched parties.

Screenshot of video from the West Virginia Governor's Office

Murray Energy Corp., a company with mines that could likely qualify its customers for the subsidy, said the company supports Justice's "attempt to preserve fuel security in the United States, by supporting the use of coal by electric utilities." Murray Energy added that West Virginia should eliminate its severance tax, a suggestion that conflicts with Justice's proposed tiered severance taxes that would rise above current levels if coal pricing improved.

In a September 2016 interview, Murray Energy CEO Robert Murray, a frequent supporter of Republican campaigns, suggested Trump could start helping the industry by stopping the "regulatory rampage" of the Obama administration. At the time, Murray said energy markets should be "without government subsidies favoring political cronies." In a statement, Murray Energy said renewable tax credits are "drastically" distorting energy markets in the U.S.

"As such, a subsidy to coal producers, as proposed by Governor Justice, would level the playing field," the company said. "However, we would prefer that the subsidies for wind and solar panels be completely withdrawn, which would eliminate the need for any subsidy of coal."

A June 2016 report from the Congressional Research Service estimated between 2015 and 2019, tax incentives for fossil fuels would reduce tax revenues by $21.5 billion. For renewables, the cost of energy-related tax incentives was an estimated $46.5 billion over the same period.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.