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US coal sector's customers dwindling, but some hoping new plants on horizon

SNL Image

A coal-burning power plant steams behind wind generators in Gelsenkirchen, Germany, ahead of international climate talks in 2017. As the world debates climate action amid a U.S. pullout of the Paris Agreement on climate change, economics and other forces continue to lower domestic demand for coal.
Source: Associated Press

U.S. coal supporters are split on how best to improve the outlook of a fuel with a shrinking domestic customer base.

Coal prices remain pressured as plants continue to retire and are not replaced with new capacity. With a pro-coal White House now backing the idea of bringing back coal but market headwinds against coal persisting, the sector is divided over whether the solution is pushing new coal plants, preserving the current fleet or both.

"Number one, let's protect the fleet," Joseph Craft, president and CEO of U.S. thermal coal producer Alliance Resource Partners LP, said on a recent earnings call. "Number two, let's look to see if we can't replace our older inefficient plants with newer efficient plants so that we can have the lower-cost energy that would still be environmentally acceptable."

Peabody Energy Corp., a miner with U.S. and Australian coal assets, said in a February presentation to investors that it had no new plans for greenfield development in the U.S. but expects its product to compete against other producers in the face of a "slow secular decline" in U.S. coal demand. In line with his previous calls for a moratorium on retiring coal plants, Peabody President and CEO Glenn Kellow said the company is working to "preserve coal plants from premature retirement."

Avoiding coal plant retirements was also at the top of a list of principles the American Coalition for Clean Coal Electricity submitted to the U.S. Environmental Protection Agency on Feb. 26 hoping to guide regulators in replacing the Obama administration's Clean Power Plan.

The Trump administration has made a number of moves to support coal, but the closest it has been to a moratorium on retiring coal was a U.S Department of Energy proposal to subsidize baseload power that would have benefited some nuclear and coal-fired power plants. The move drew sharp criticism from much of the energy sector, including some holding assets that might have benefited from the proposal.

Even as the administration tries to boost coal, owners of U.S. coal plants are increasingly touting their shifts to other energy sources on calls with their investors. On Feb. 27, AES Corp. executives said that while coal remains important, it is significantly reducing the fuel's share in its portfolio from 41% to 29% by the end of 2020. Instead of major generation sources, the company is thinking about using some of its coal assets as "large batteries" that can be run at utilization rates around 20% instead of 40% to 50%.

FirstEnergy Corp. President and CEO Charles Jones Jr. recently told investors that if certain markets do not change the way they administer power and states do not step in to provide support, "there will be no coal or nuclear plants left in these markets." The company's competitive subsidiary, FirstEnergy Solutions Corp., has struggled as the parent looks to exit the merchant coal space and get back to more predictable earnings and cash flow from regulated markets.

Building a new coal plant, generally thought of as a multidecade investment, is capital intensive. In addition to thinking about cheaper ways to build out a portfolio, a company building a new coal plant considers potential state, federal or legal action that could affect its investment.

Longview Power LLC President and CEO Jeffery Keffer runs a coal-fired power plant near Morgantown, W.Va., that is among the newest and most efficient in the country. He said older coal-fired power plants, and the political will to keep them running, are part of the problem. He said Longview can compete with natural gas in today's market and should be an example for building efficient coal plants to lower emissions without eliminating coal from the nation's electricity generation portfolio.

"There's an awful lot of power that is still being produced, that is still available to be produced, from older plants that probably should have retired by now," Keffer told S&P Global Market Intelligence. "Given what's going on in the marketplace, they will be. The economics of keeping those plants operating just isn't there anymore."

Matt Preston, Northern America thermal coal markets research director for Wood Mackenzie, said that though a lot of older coal-fired power plants are "hanging by a thread," he does not envision any new coal-fired plants being built at current prices for alternatives including wind and solar.

"If a lot more regulations are streamlined and they are pulled out by the Trump administration, it's possible. But there's still a huge hurdle to go through to build those plants," Preston said. "They're almost too late."