Power plant closures quench demand for Pennsylvania's coal

Jan 14 - Pittsburgh Post-Gazette (PA)

More than 100 coal-fired power plants nationwide either plan to shut down or already closed their doors in 2014, as the market responds to stricter environmental regulations, cheap natural gas and lackluster electricity demand growth, according to a survey done by the Energy Information Administration .

Behind all those closures sit coal mines -- many of them in Appalachia -- coping with the loss of customers for the fuel that reigned supreme for many decades.

More than 17 million tons of coal from Appalachia went to plants slated to shut down in 2013 alone, the latest full year for which such data are available. And the impact is likely to be even bigger, since the EIA's list of recent or coming closures doesn't include generators planning a transition from burning coal to burning natural gas.

Companies have been bracing for this change for years, but many have indicated that it's coming faster and blunter than expected, driven in part by a slew of environmental regulations.

"That's an unprecedented change to America's power system in what constitutes the blink of an eye in energy markets -- creating enormous potential for market disruptions, supply shortages and rate spikes," Deck Slone, senior vice president of strategy and public policy at St. Louis -based Arch Coal , wrote in December.

Like its peers, Arch's stock price reflects the gloom. At $1.30 per share, Tuesday's closing price represented a one-year low. Virginia -based coal producer Alpha Natural Resources' also saw its 52-week bottom at $1.13 .

"For crying out loud, who would think you could buy coal company stock for under two bucks?" said Kevin Cardwell , president at North Carolina -based consulting firm Cardwell Energy Associates Inc.

SNL Energy, an energy research firm in Virginia , projected that about 25 gigawatts of coal capacity has left the market because of plants closing since 2009. That might double by 2022, the firm projected.

Bloomberg New Energy Finance believes more power plant closings could represent about 91 million tons of potential lost coal demand by 2017, according to analyst Andrew Cosgrove's estimate last September. He did suggest that burning more coal at the plants that stay open in order to increase their efficiency could mitigate some of that loss.

Central Appalachian coal mines stand to be big losers in the transition away from coal, Mr. Cosgrove wrote in November. That includes the historically prolific supplies in Virginia , southern West Virginia and eastern Kentucky .

"Falling demand may hasten mine closings in the region, where coal production has dropped 32 percent since 2009," he wrote.

Some companies have been bracing for the fall for years.

"As the largest producer in Central Appalachia , we took actions proactively over the past 18 months to prepare for a smaller footprint in the basin," said Steve Hawkins , a spokesman for Alpha Natural Resources . "We've also seen others in the industry take similar actions to adjust to this new normal."

Between 2012 and 2014, Alpha idled 64 mines, reduced its shipments in the eastern part of the country by 28 percent and got rid of more than 4,000 employees.

Northern Appalachia -- which includes Pennsylvania , Ohio and northern West Virginia -- won't escape unscathed. According to Bloomberg's analysis, Murray Energy's Powhatan No. 6 Mine in Belmont County, Ohio , "likely will be one of the most affected, losing sales of almost 600,000 tons."

Some companies appear to be more sheltered from the drop in demand for coal than others.

Even though Alpha's mines shipped the most coal to plants slated to close over the past five years, those same mines shipped about 85 percent of their coal to facilities that will remain in operation.

For Cecil -based Consol Energy Inc. , second behind Alpha in total tons shipped to plants that are closing, the affected plants make up just 6 percent of the clientele for its mines.

The situation looks worse for suppliers such as Virginia -based James River Coal Co. , which is in the middle of a restructuring, and Virginia -based James C. Justice Co. , which has shed a significant portion of its mine portfolio in recent years. The producers stand to lose 28 percent and 48 percent of shipments, respectively, from mines serving affected plants.

For decades, contracts between coal companies and utilities have included force majeure clauses, according to Mr. Cardwell , who has reviewed hundreds of contracts and negotiated dozens during his 18-year tenure as a coal buyer for a Kentucky utility.

Such clauses typically protect power plants from having to take delivery of coal they no longer need if the power plant is prevented from running by some new environmental regulation or another unforeseen circumstance.

Yet lawsuits seem inevitable following current and projected mine closures. "I have a feeling that there's going to be pretty significant litigation in the future," Mr. Cardwell said.

One issue that may arise as power plants claim that environmental regulations pushed them out of business is how much of a role competition from cheap natural gas played in their decision either to shut down or use a different fuel.

Gas is all the rage at the moment. The commodity is trading at around $3 per million British thermal units, or Btus, down from more than $13 in the summer of 2008, towards the beginning of the shale revolution in Appalachia .

That's why some operators, like Consol Energy , now boast flexibility in their contracts with utilities. Consol has refocused its company on a growing shale gas business, retaining only a handful of coal mines.

According to James McCaffrey , senior vice president of marketing at Consol, who spoke at Platts' Coal Marketing Days in Downtown in September, "Customers want to flip between oil and gas."

He said the company was actively negotiating a deal where a utility could choose its fuel depending on its preference.

"That's a good marketing approach: 'I'll give you Btus, you tell me how you want them,' " Mr. Cardwell said.

Anya Litvak : alitvak@post-gazette.com or 412-263-1455.

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