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New King University Study Takes a Critical Look at the “War on Coal”

BRISTOL, Tenn., July 21, 2016 –The King Institute for Regional Economic Studies (KIRES) has released a new study. KIRES Report No. 16, “An Economic and Statistical Analysis of the ‘War on Coal,’” was prepared by Dr. Sam Evans, director of KIRES and associate professor of Finance and Economics in the University’s School of Business and Economics.

According to Evans, “The coal industry in the United States has been hit by a ‘perfect storm’ in recent years. Several factors have contributed to the decline in the coal industry: heightened competition with natural gas in electric power generation, environmental regulations affecting coal – fired power plants, federal and state government subsidies for the development of wind and solar power generation capacity, and weakening export markets for U.S. coal.”

This report focuses on the demand for coal for electric power generation, the principal market for U.S. coal. In 2015, the electric power sector accounted for 92 percent of the domestic market for coal and around 85 percent of the total market for U.S. coal. The report notes that “after hovering in the 48 - 52 percent range during 2000 - 2008, coal’s share of fuels used for electricity generation has fallen precipitously in recent years, to 33.2 percent in 2015 and a forecast 29.9 percent in 2016.”

Evans reports that Environmental Protection Agency (EPA) regulations have been characterized by the coal industry and its supporters as a “war on coal.” Others argue, however, that the recent decline in coal use for electric power generation is primarily market-driven, namely the increased use of natural gas at the expense of coal. The report notes that coal and natural gas have been competing in electric power generation for decades. Until recently, coal had a competitive edge. From 2000 through 2008, the annual average ratio of coal cost to natural gas cost (cost of coal and natural gas delivered to electricity generation plants) ranged from 0.19 to 0.35; from 2009 through 2015, coal lost its competitive edge as the ratio jumped to a range of 0.45 to 0.70.

According to Evans, “The objective of the study is to investigate these opposing views in an impartial manner. The statistical model developed for this study allows one to separate the government policy effects from the market effects. The model provides a quantitative estimate of the effects of government policies on the consumption of coal for electric power generation and, by extension, effects on coal production and employment.”

Evans writes that the key assumption for the statistical model is that changes in coal consumption that are not attributed to coal’s competition with natural gas are attributed to EPA regulations and the state and federal subsidies for wind and solar. He notes that “this is a reasonable assumption given the stability in total electricity generation over time, the remaining variable of any importance.”

The report found that government policy began to significantly reduce coal consumption for electric power generation in 2013. Prior to 2013, the impact was relatively small. The negative impacts on coal consumption have accelerated since 2013, owing in part to a significant drawdown in coal-fired generation capacity.

According to the Energy Information Administration (EIA) in the U.S. Department of Energy, the amount of coal-fired generation capacity retired in 2015 was about 4.6 percent of the nation's coal capacity at the beginning of that year. Nearly half of the 2015 retired coal capacity was located in three states—Ohio, Georgia, and Kentucky—and those states each retired at least 10 percent of their coal capacity. The EIA reported that 30 percent of the coal capacity that retired in 2015 occurred in April, which is when EPA’s Mercury and Air Toxics Standards (MATS) rule went into effect.

The final deadline for compliance with the MATS rule was April 2016. Consequently, coal plant retirements in 2016 are likely to be record high, three times greater than 2015, according to EIA.

Evans states that “if the EIA forecast for coal plant retirements in 2016 materializes, the amount of coal-fired generation capacity retired this year will easily exceed the total retired during the previous decade. Clearly, coal plant retirements in 2015 and 2016 are motivated by the costs of complying with the MATS rule. Nevertheless, while there is a significant drawdown in capacity, there is room for sizeable expansion in coal-fired electricity generation should the need arise.” Coal plants are operating at historically low rates of capacity utilization. The EIA reported capacity utilization by coal plants at 54.6 percent in 2015. Capacity utilization in first quarter 2016 averaged 46.3 percent, down from 59.3 percent a year earlier.

The unprecedented low rate of capacity utilization in first quarter 2016 was occasioned by a rise in the ratio of coal cost to natural gas cost, from 0.56 in first quarter 2015 to 0.80 in first quarter 2016. According to Evans, “the developments over the past year or so demonstrate in a dramatic way the influence of both market forces and government policies on the U.S. coal industry.” 

Evans adds that “the reduction in the quantity of coal consumed for electric power generation ultimately translates into less coal production and fewer coal mining jobs. The cumulative amount of coal displaced by EPA regulations and government subsidies for renewals is an estimated 105.27 million short tons through 2015. Based on average productivity, it would take 9,269 coal miners working fulltime - 2,080 hours per year - to produce that amount of coal.”

Forecasts are that coal displaced by EPA regulations and government policies will increase to cumulative totals of 141.2 and 179.59 million short tons, respectively, through 2016 and 2017. These quantities are the equivalent of 12,433 U.S. coal mining jobs through 2016 and 15,900 jobs through 2017.

Evans stresses that “looking farther down the road, the key to coal production and use is whether the Clean Power Plan (CPP) promulgated by the EPA is implemented.” The CPP, which imposes caps on carbon dioxide emissions from fossil-fueled power plants, is scheduled to take effect in 2022. However, CPP implementation was recently stayed by the U.S. Supreme Court pending judicial review.

In May 2016, the EIA reported an analysis of two scenarios – implementation of the CPP versus no CPP. Evans notes that the EIA analysis “paints two very different futures for U.S. coal.”

If the CPP is not implemented, the U.S. coal industry of 2030 - 2040 would closely resemble today’s industry in terms of production and use levels, according to the EIA analysis. However, if the CPP is adopted, coal production and use in 2030 – 2040 would be about two-thirds of current levels. Coal’s share of electricity generation, 50 percent a decade ago and around 30 percent currently, would plummet to 21 percent by 2030 and to 18 percent by 2040. Evans adds “under this scenario, the health of the coal industry, especially Appalachian coal, depends increasingly on export markets.”

KIRES Report No. 16, “An Economic and Statistical Analysis of the ‘War on Coal,’” and the 15 previous reports, are available electronically at http://kires.king.edu.

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