By Alexander Jones – firstname.lastname@example.org
The landscape of the US energy market is set to change – impacting the centuries old coal mining industry which has dominated as the primary source of energy fuel for electricity generation. There have been concerns over carbon emissions for several years, and links to climate change have set in motion the introduction of environmental regulations such as the US EPA’s Clean Power Plan, Climate Action Plan and Mercury and Air Toxics Standards for New Power Plant. Hence it is little doubt that the US coal industry and the emerging gas industry will undergo structural changes under a mix of policy and attitudinal changes in the US and across the globe. Under such changing paradigms, there are many questions to answer, such as how would the US coal industry survive? What options are available to the mining companies? And what changes will occur within the gas industry?
With lower domestic consumption and unfavorable regulations in the horizon, the US coal industry could adapt to an export oriented environment. Under circumstances of prolonged high costs of production and the lack of investment in infrastructure (both as a means to maintain production capacity and to reduce greenhouse gas emissions), the US coal industry could only be seen as a high – cost marginal exporter to the Asian market – a role which the US coal industry has adopted on several occasions before. With investment in technology (carbon capture for example), and the efficient burning of coal, the coal industry could weather the radical legislative changes. However, these investments add to costs and these costs are rising – almost to the point that the market position of a high – cost marginal exporter to the Asian market may not be sustainable in the long term. Moreover, in the long term, China and emerging economies are likely to change their attitude to environmental pollutants – it is an inevitable attitudinal shift that emerging economies transcend through where society requests and expects civic obedience, better standard of living and quality of life improved by imports. It is also under these weights of expectations that governments introduce legislations to deliver on their part of the ‘Social Contract’ with its citizens.
While investors may anticipate the coal mining industryto be a non-growth or a declining industry in the future, they expect the US gas industry to increase in importance in the US. Consumption patterns in power generation are set to increase and rival that of coal in the coming years. However, the gas industry will not be immune to the proposed EPA regulations. The proposed regulations by the US government impact the existing 1,600 coal and gas powered electricity generators, and, regulations for new power stations are already in the works.
Nevertheless, gas, which burns more cleanly than coal, is set to increase in share of electricity generation, supported by domestic production. For instance, the 11 utilities which form the network for the American Electric Power, has reduced the portion of coal being used in electricity generation. On the contrary, domestic gas production has increased in recent months to accommodate for an increase in domestic usage.
Investors should prepare for this change in the energy landscape. The divestment has already begun with five of Consol Energy’s coal mines in the Appalachian mines and James River Coal reducing a significant portion of its workforce in reaction to the impending change. However, due to delays in implementation, coal could remain the dominant source of energy in the short term, particularly when legal challenges and protracted opposition to EPA’s authority to regulate greenhouse gas emissions, surface. Also, from the perspective of a legislative process, delays and alterations to the proposals could originate from a constellation of factors including: Congress having the ability to take away EPA’s power to regulate, mid-term elections later in 2014 (which could change the balance of power), and, presidential elections in 2016.
The US coal industry would need to transform to accommodate for the change in landscape. There are several difficult options available to the industry including, coal mining companies and utilities investing in technologies that curb the emission of greenhouse gases and lobbing against the EPA regulations in favor of more flexible measures before the EPA finalizes its proposal in mid-2015.
For US coal miners to capitalize on favorable export market conditions to Asia, the cost of domestic production must remain lower for exports to be economically feasible. The other practical measure is to adapt to the changing environment. Since the EPA has targeted existing and new power plants, offering a flexible option to reduce the emissions on a state level (as opposed to a company), the utilities and the mining companies could set aside a contingency or a research and development fund to invest in technology prior to the deadline for implementation. This measure could work in the long term to fast – track the technological change and also benefit with respect to financial accounting. Other options include, either or a combination of, a carbon trading scheme, carbon capture scheme and investing in renewable energy. However there is also the option of underutilization and plant closures available to miners. Should the coal mining companies collaborate with coal fired power plants to invest in technologies and infrastructure to comply with the regulations, then, coal production could also be supported by sustained domestic consumption – bucking the current trend towards gas. If this scenario were to gain traction, then the regions currently producing coal need to be supported by network systems extending from mines to ports and domestic power generators. The coal industry could also capitalize on US utilities looking to diversify their sources of fuel to prevent complete dependency in one fuel, which can negatively impact the consumer market with price volatility.
There are some hard choices for the coal industry in the US, but they if none of the choices involve adapting to change, then it likely that over a period of time, the industry will succumb to the evolution of attitudinal changes to the quality of life.