Archive for July, 2012

It’s no great surprise that Patriot Coal, a 2007 spinoff from Peabody Coal, filed for Chapter 11 protection yesterday. It’s been fighting a war on several fronts.

One front, and the one with the heaviest artillery, is pricing. Natural gas is the economic competitor of coal for electricity generation, and fracking has opened up major new natural gas supplies in Pennsylvania and Texas. The natural gas glut in the market is so severe that there are legitimate concerns about running out of storage. Add to this cake batter one part recession and one part mild winter, and you’ll bake up the lowest natural gas prices in ten years. Consequently, electric utilities, coal’s biggest customers, have been switching to lower-priced natural gas. Coal-fired generation is down about 9% from 2011 to 2012.

Another front consists of environmental regulations from Washington, but the newspapers and others are simply wrong to say that these regulations are new, or that they represent a dark conspiracy between environmentalists and the Obama administration. But pinning plant closings on USEPA rulings makes for a much better headline and a story more easily digested by a mass readership.

The real story is that the regs of which coal now so vociferously complains began in 1990, during the administration of  Bush the Elder (a Republican, if memory serves). Poppy initated, and Congress approved, major amendments to the Clean Air Act that authorized the EPA to regulate emissions of mercury, arsenic, and a few other toxic airborne little critters. It wasn’t until 1998 that the EPA came out with a finding that limits on mercury emissions were appropriate and necessary, though the agency didn’t promulgate any standards at that time. It wasn’t until seven years later, in 2005, under Bush the Younger, that the EPA came out with its Clean Air Mercury Rule (CAMR), the first attempt to regulate mercury emissions. Rather than directly regulating these emissions as hazardous air pollutants, though, the CAMR created “New Source Performance Standards.” The reader will of course recall news reports on the controversies about whether a refurbished coal-fired generating station was really a “new” source or not. Part of the objective at that time was to initiate a cap and trade system, but that USEPA rule was eventually vacated in a federal court ruling in 2008.

Cap and trade, of course, has gone the way of the crossbow, the walled city, and the 8-track tape.

Then in March 2011, fully six years later, the USEPA replaced the CAMR with proposed national emission standards for hazardous air pollutants from coal- and oil-fired power plants, this time under a maximum achievable control technology (MACT), approach. Power plants (and other sources) would have until 3 years after the final rule was published to come into compliance. The final rule was published on February 16, 2012. (77 Fed Register 9304).

During this decade-plus of federal back-and-forthing, the states weren’t exactly standing still. Illinois was one of more than a dozen states that enacted regulations to control mercury emissions from power plants, and because these were state rules they were not affected by the federal vacation of the USEPA’s new source approach. Illinois’ regs were actually stricter than what the feds proposed, requiring a 90% reduction in mercury emissions. There were some ups and downs in implementation, but the Illinois EPA reported that the limits were both technically achievable and economically feasible.

So, anyone who tells you that the requirements for coal-fired stations were unknown before Obama came to town is a bit like Captain Renault in Casablanca (the Vichy police inspector who was shocked (shocked!) to find that gambling was going on in Rick’s Café Americain – just before being handed his winnings.)  The only authentically new and surprising thing are the historic lows for electricity prices. In the spring of 2008, no one would have predicted current price levels, and those prices have as much to do with the economic feasibility equation for a coal-fired generator like Midwest Gen as does the MACT.

Retrofitting coal-fired plants to control emissions is an expensive proposition (hence the 2nd Bush administration’s emphasis on making the new rules apply only to “new sources”). For example, a retrofit of the Big Sandy coal-fired plant in Kentucky, a state not open to retail electric competition, would result in a 30% electric rate hike. Retrofitting the Fisk and Crawford staions in Chicago could cost hundreds of millions, and because Illinois has retail competition, there is no way for the generator to pass that cost on to ratepayers. Rather, it would simply make the cost of power generated by these plants uncompetitive.

Another front for coal is against the environmentalists. Sierra Club, among others, has been pressing local officials to shut down coal plants in their jurisdictions. The recently announced closings of Midwest Generation’s Fisk and Crawford coal-fired plants in Chicago by the end of 2014 is a result of that effort. Of about 500 coal-fired stations in the U.S., they aim to shut down about 100 in the next few years.

And natural gas has been helping the environmentalists. Aubrey McClendon, CEO of natural gas producer Chesapeake Energy, has given $26 million to the Sierra Club to support its efforts.  A fossil fuel company and an environmental NGO make strange allies, but Mr. McClendon evidently agrees with Winston Churchill’s saying that “the enemy of my enemy is my friend.”

And the final front for Patriot is its own reserves, which are mostly in Appalachia. It’s hard to think of any type of coal as low-hanging fruit, but after a century and more of mining in Appalachia, all the easy to get coal has been extracted, and getting at the remainder is a higher-cost proposition. Peabody undoubtedly factored this into its spinoff calculus.

After coal, next up in the troubled company category? Energy is all about infrastructure, and the infrastructure for coal is railroads. Coal is the biggest volume commodity on U.S. railways, and as coal shipments decrease, so will freight receipts. Some coal will be sold overseas, of course, but it’s an open question whether those sales will pull all the chestnuts out of the fire, so to speak.

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