A series of articles on Seeking Alpha and elsewhere have assessed the prospects of the coal industry and, of course, the implications for the stock prices of various coal companies. (See Does Coal Still Reign Supreme?; 5 Top Coal Picks for the Next 20 Years; Coal's Brightening Outlook; China Coal: Way, Way Up.)
While these acknowledge that concern over climate change and CO2 emissions could affect coal usage, the underlying assumptions are that coal’s U.S. market share as a fuel for generating electricity is secure, that overseas markets are booming, and that there is a strong bullish case for coal stocks.
These assumptions both overstate and understate coal’s prospects, for three basic reasons:
- As far as intermediate-term domestic use is concerned, the usual assumptions are too optimistic. Coal is under a broad and well-funded assault by an alliance of militant environmentalists and natural gas interests, focused on state and local decisions. While Big Coal focuses on national issues such as cap-and-trade, it has been slow to recognize this guerrilla campaign. In classic guerrilla war fashion, it holds the capital but not the countryside, and is probably on the verge of a loss of market share that could be as great as 33% over the next 3-5 years.
- On the other hand, overseas markets, especially China, are indeed booming. Furthermore, it is economically feasible to supply the Chinese market with upgraded coal from sources in the U.S., such as the Powder River Basin or Alaska. Since China is unlikely to be stupid enough to buy completely into the West’s government-subsidized climate change hysteria, this is likely to be good business for decades to come.
- Third, there is a longer-term argument for the health of the domestic coal market. Even if one thinks that CO2 is a crisis (and I personally am a proud denier), it is a long-term problem, requiring a time horizon of decades. Precipitous action makes no sense, and the U.S. should be using its cheapest fuel (coal) to finance a long-term transition to other sources of energy, probably primarily nuclear, over the next century. As the American people are forced to face the consequences of steep rises in energy prices, they will educate themselves on these realities and react against the pied pipers who led them down the green path.
These three points are addressed in order. Today’s article addresses the assault on the domestic coal industry by the environmentalist/natural gas industry alliance, and assesses its prospects pessimistically. Subsequent pieces, which address the export issue and the longer-term prospects for the domestic industry, are sunnier.
The Environmentalist/ANGA Attack on Coal
The environmental movement hates coal. Spearheaded by the Sierra Club, which has budgeted $18 million and 100 people to its anti-coal campaign, the enviros have made it the target of a Saul Alinsky-style activist campaign -- “Pick the target, freeze it, personalize it, and polarize it.” (Rules for Radicals, No. 13.)
For more detail, see, for example, Media Savvy Youth Are Blogging Coal To Death; the Sierra Club’s Clean Coal Campaign and Campuses Against Coal; the SourceWatch Portal on Coal Issues; CoalSwarm; the links to 350 anti-coal citizen groups; the Greenpeace “Unfriend Coal” campaign against Facebook; Google’s move toward wind power; or Death of a Thousand Cuts: A messy but practical strategy for phasing out the U.S. coal fleet;
Environmentalism is a church militant that hates all fossil fuels, but that does not keep it from heeding Alinsky’s Rule No. 12, which is “The price of a successful attack is a constructive alternative.” A recommendation to shut down electricity generation would not be credible, so environmentalists have embraced natural gas. (They don’t really mean it, and gas will be next on the target list, but the position serves present purposes.)
The natural gas industry has its own interests, of course, and is delighted to make common cause with the Sierra Club. It has a created a fighting ship in the American Natural Gas Association (ANGA), which has raised an $80 million war fund, and has launched a “Project” to phase out coal plants in favor of natural gas, starting with those that are “inefficient.” The big objection to natural gas has always been its cost and price volatility, but the industry is making the case that new techniques of extraction from shale will solve these problems.
The campaign against coal is quite successful. DOE says that “Eight [coal] plants totaling 3,218 MW have become operational [in 2009]” and “2009 has had the largest new coal capacity additions in one year since 1991,” and the AP recently ran a story saying that construction of coal plants is proceeding apace “more than 30 traditional coal plants have been built since 2008 or are under construction,” but these stories are lagging the arc of events.
The reality is that the pipeline of additional capacity is looking empty, and the additional 28 coal-using plants that the industry thinks it has under construction look like vaporware. A recent New York Times article on Twilight of the Coal Era? quoted an equipment manufacturer: ”looking forward, ‘I don’t know of any negotiations we have currently going on for new coal plants.’”
Death of a Thousand Cuts sums up the situation:
As of late February [2010], activists had derailed 97 of the 151 new plants that were in the pipeline in May 2007. Since 2001, according to the Sierra Club, 126 coal plants have been stopped. In 2009, not a single new coal plant broke ground. All this was accomplished . . . by a broad, feisty movement that inflicted a "death of a thousand cuts."
As Death said, it is at the state and local level that the ANGA/enviro alliance is rolling up victories. In April 2010, Colorado enacted the Clear Air-Jobs Act, which requires conversion of 900 megawatts of coal-fired capacity to natural gas, and the governor called the measure “a national model for retiring coal-fired power plants.” Nevada is following the same track. In June, North Carolina approved the killing of the planned construction of a new coal burning plant in favor of one using natural gas, after holding two public hearings at which no witnesses appeared.
A Daily Finance article last year observed:
It has, moreover, become very difficult to build new IGCC coal plants. Texas-based utility TXU was forced to drop eight of a planned 11 new coal-fired plants -- the three remaining were challenged in court. In November of 2007, Southern Company canceled a plant in Florida two months after breaking ground. . . . Other plants have been derailed in Kansas, Colorado, Delaware, Ohio, South Dakota, North Carolina, Arizona, Iowa and Oklahoma.
To switch from Alinsky to John Boyd, the environmentalist/ANGA alliance is far inside the coal industry’s OODA (Observation-Orientation-Decision-Action) loop at the state and local level.
The ultimate goal of the environmentalist/ANGA alliance is to eliminate coal. The intermediate goal is to shut down “inefficient” coal-using plants, and then to increase the use the existing stock of natural gas fired generators to replace electricity produced by coal. At present, while 45% percent of electricity is produced from coal, only 31% of total capacity is coal-based. Only 23.4% of electricity is generated from natural gas, but fully 39% of total generating capacity is based on gas. (See Displacing Coal with Generation from Existing Natural Gas-Fired Power Plants.) Ergo, turn on the 15% of natural-gas-based capacity that is now idle and a third of the coal usage would be eliminated.
It is not that simple, of course, in that there are many questions about the technical feasibility of this proposal, and about the costs. (See Implications of Greater Reliance on Natural Gas for Electricity Generation – July 2010.) But in terms of PR, it is an appealing sound-bite, and given the success of the anti-coal campaign at the grass roots, utilities may find themselves obliged to accept, and even advocate, this strategy.
The coal industry has tried to deflect the attacks on it in several ways. It has conducted an expensive, feel-good campaign through a campaign of big media ads, but it has nothing comparable to the social media and grassroots activism of its opponents, so the glossy ads do not much influence the actual decisions.
The coal industry has also embraced the idea of more efficient plants and carbon capture and sequestration (CCS), but, while the increased efficiency is real and makes significant reductions in conventional pollutants, it does not make coal comparable to natural gas in terms of CO2 emissions. CCS is looking like an expensive dream, and is not feasible on any time scale that would help the coal industry in the current time frame of decision, so the industry has no effective counters to the climate change scare stories.
Given all these factors, it is difficult to see coal in the U.S. as anything other than a static, at best, or even declining industry, possibly by as much as 33%, over the next few years, if the anti-coal alliance can sell its intermediate goal, and with a possibility of an even greater decline if the politics snowball.
Rather than end on such a pessimistic note for the coal industry, however, I should note that the two forthcoming parts of this analysis are more cheerful. The U.S. has been called the Saudi Arabia of coal, and the prospects for a vibrant export market look good. In addition, the long-term prospects for the domestic market could also improve, if the coal industry learns to counter the current anti-coal zealotry with accurate analysis of the climate change issues.
[Next: The Export Market]
Disclosure: No positions
