Coal Age

JAN-FEB 2017

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24 January-February 2017 forecast 2017 continued The bright spot for coal prices in 2016 was metallurgical coal. Contract prices for met coal surged in 2016 and for the quar- ter ending December 2016, prices were settled at $200/metric ton (mt). Prices for the March 2017 quarter have been locked in at $285/mt. Chinese authorities cut domestic coking coal production. China's steel production, however, remains ro- bust, and Australian mines are filling the gap. Spot prices for metallurgical in the second half of 2016 tripled to $300/mt, but have since diminished to $180/mt. The improving met prices have inspired many small U.S. coal operators to invest in facil- ities to capitalize on this market. While met exports may increase, in- ternational demand for thermal coal will remain soft and U.S. coal exports were ex- pected to decline in 2016. According to the EIA, 26 million tons of coal is estimated to have been exported to Europe in 2016, down from 38 million tons in 2015. U.S. coal exports to Asia also declined in 2016, particularly to South Korea, where exports are estimated to have been about 3.5 mil- lion tons, a 43% decrease from the 2015 level. EIA estimates that the United States exported 57 million tons of coal in 2016, a 23% decline from the previous year. Possible Regulatory Relief All of the new EPA regulations have un- fairly distorted traditional energy markets. Reviewing several scenarios in its Annual Energy Outlook 2017 (AEO2017), the EIA models explain how projected electricity generation is affected by fuel prices, es- pecially natural gas prices, and the CPP, a final EPA rule issued in 2015 whose en- forcement was stayed by the U.S. Supreme Court in February 2016 pending the reso- lution of legal challenges. Without the CPP, there is less incentive to switch from coal to natural gas. In the scenario where the CPP is not implement- ed, coal again becomes the leading source of electricity generation by 2019 and retains that position through 2032. Fewer coal plants would be retired and, as a result, natural gas and renewable capacity additions would be lower than if the CPP were implemented. In addition to environmental regula- tions, the price of natural gas is an import- ant factor in decisions about the operation, retirement and expansion of electricity gen- eration capacity. Lower natural gas prices would lead to more natural gas-fired elec- tricity, displacing both coal-fired and re- newable generation. More coal plants retire or switch to natural gas and less renewable capacity is built. Conversely, higher natural gas prices result in more electricity gener- ation from both coal-fired and renewable plants, and coal-fired generation exceeds natural gas-fired generation through 2040. The EIA also released preliminary data from its annual survey of electric genera- tors (EIA-860), which provides informa- tion on pollution control equipment at electric power plants. A significant num- ber of electric power plants recently in- stalled such equipment in response to the EPA's Mercury and Air Toxics Standards (MATS), which required all coal generators that sell power and have capacity greater than 25 megawatts (MW ) to comply with specific emission limits by April 2015, al- though some units received extensions, as discussed below. Although hundreds of coal generators have capacities below 25 MW, those units collectively represent less than 1% of total coal capacity. Coal-fired generating capacity in the United States dropped 8% from 299 giga- watts (GW) at the end of 2014 to 276 GW, as of April 2016. Coal-fired generation's share of total electricity generation fell from 39% in 2014 to 28% in the first four months of 2016. Between January 2015 and April 2016, about 87 GW of coal-fired plants installed pollution control equipment and nearly 20 GW of coal capacity retired — 26 of those retirements occurred in April 2015, the MATS rule's initial compliance date. Most remaining coal plants applied for and re- ceived one-year extensions that allowed them to operate until April 2016 while de- veloping compliance strategies. If a coal unit did not meet MATS requirements by then, it had to either retire, switch to anoth- er fuel, or cease operation. A few plants, to- taling 2.3 GW, received additional one-year extensions, giving them until April 2017 to comply. About 5.6 GW of coal capacity fuel switched primarily to natural gas. Can President Donald Trump reverse the trend? He nominated Oklahoma Attor- ney General Scott Pruitt to be the next EPA administrator. Seeing the Obama EPA for what it was (excessive federal overreach), he fought against MATS and the CPP from the state level. As an attorney general, he sued the agency because he saw its expansion of authority exceeding statutory limits, impos- ing significant economic costs while mak- ing no impact on global climate change. He didn't act alone. A total of 27 states sued the Obama administration over the CPP and the EPA's Waters of the United States regulation. The U.S. economy is powered by elec- tricity, and electrical demand will only increase significantly when America ex- periences a true economic recovery and the manufacturing sector begins to grow again. In the meantime, power producers hold the cards with excess capacity and they will choose the least expensive fuel that meets their needs. Figure 8 — Survey Demographics

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