Last April I posted some thoughts on The Future of Coal that were less than optimistic. But with President Trump vowing to revitalize the industry and to put coal miners back to work, was I wrong? Can Mr. Trump deliver on his promise?
Coal’s Decline
First, let’s set the record straight. On the employment side, there has been a long-term decline − from a peak of about 250,000 workers in the 1920s to currently 50,000 − but with most of the decline due to replacement of workers by mining machinery. Through the years, automation enabled a reduction in the work force while maintaining high levels of production. It's only in the last decade that the effects of declining production kicked in.
Industry advocates attribute declining production to environmentalists, who they accuse of waging a "war on coal." There is an element of truth to the accusation. There are environmental and health risks associated with burning coal. Toxins are released to the atmosphere and coal ash deposits can breach containment, polluting surface and ground water. Burning coal also releases large amounts of carbon dioxide (CO2) - a greenhouse gas - and is the largest contributor to global warming. But, in fact, what’s happened over the last decade has less to do with the environment and more to do with market dynamics.
Coal’s Competition
About 92% of the coal mined in the US is used to generate electricity, and coal is feeling the effects of stiff competition. From fueling 50% of US electricity generation in 2006, coal dropped to 33% in 2015, while natural gas increased from 20% to 33% and wind and solar energy from virtually nil to 5.3%.
The ability of natural gas to capture market share was driven by one game-changing factor – a reduction in the price of gas enabled by access to large domestic resources through hydraulic fracturing, or simply fracking. The ability of wind and solar energy to gain a foothold was also due to large cost reductions. The bottom line is that coal is losing a low-cost advantage it had enjoyed throughout the 20th century. Let’s look at some numbers.
The levelised cost of electricity (LCOE) is used to compare costs for different power generation options. It is the total cost of building and operating a power plant over its projected lifetime divided by the total energy produced over that lifetime. Measured in units of dollars per megawatt-hour (MWh), the LCOE of coal-fired power plants in the US varies from $65 to $150 per MWh. The lower range corresponds to plants that do not provide for carbon capture and sequestration (CCS) - capturing CO2 from the exhaust gases and permanently storing it underground - and the upper range to plants with CCS.
Contrast the costs for coal with those for natural gas, which range from $52 to $78 per MWh and for which much lower carbon emissions reduce the need for CCS. Much the same can be said for carbon-free renewables. Over the last six years, the LCOE of onshore wind has dropped by 61% − now ranging from $32 to $77 per MWh. The lower portion of the range represents high wind regions of the central plains and the upper portion to other, less windy regions of the country. The cost of solar energy has dropped even more (82%), now ranging from $50 to $70 per MWh where the lower end corresponds to sun-rich regions of the Southwest.
In certain regions of the country, wind and solar have reached grid parity. That is, even without subsidies, costs are now competitive with coal and natural gas. Moreover, they will continue to drop, increasing competitiveness and enabling expansion to larger swaths of the US.
Not surprisingly, coal power plants have been shutting down. Ninety-four plants were retired in 2015, with another 41 scheduled for 2016 and more planned by the end of the decade. In contrast, only three new plants are scheduled to open by decade’s end.
If the Trump administration acts on its intentions to revitalize the coal industry, what can it do?
Trump’s Options
Ignore the Effects of Coal on Climate Change
A blunt force approach would be to dispense with any effort to reduce carbon emissions from the electric power sector. That would allow coal to retain some semblance of cost competitiveness, perhaps for as long as a decade. But, the move would be considered a violation of the Clean Air Act and would be vigorously challenged in court. It would also be strongly resisted by states that have already embarked on initiatives to reduce carbon emissions and/or are experiencing robust economic development in wind and solar energy.
By essentially abandoning its commitment to the 2015 Paris Climate Accord – signed by almost 200 nations – the approach would also blemish the US’s reputation as a global leader and probably render it a rogue nation in the court of world opinion. Also, it is unlikely that utilities, merchant power producers and capital markets would take the bait. The future of solar and wind is becoming ever more compelling, and the risk of future policy changes that curb emissions would be omnipresent.
Address the Effects of Climate Change by Implementing CCS
Alternatively, the Trump administration could encourage retrofit of existing coal-fired power plants and/or construction of new plants with CCS. But there are obstacles, namely high capital and operating costs and the need for large government subsidies. I discussed this issue in my first posting on The Future of Coal, and the numbers still don’t look good.
For four utility-scale CCS projects in operation or under consideration, capital costs per unit of electric generating capacity range from about $4,000 per kW to $16,000 per kW. To put these numbers in perspective, consider that it only costs about $1,000 per kW of generating capacity to build a modern gas-fired power plant. And, the costs of wind and solar farms, which are now less than $2,000 per kW, continue to drop. Within five years, the cost of constructing a utility-scale solar farm is expected to drop below $1,000 per kW.
Of course, government subsidies can be used to encourage private sector investment in coal-fired plants with CCS. In fact, generous subsidies ranging from $200 to $900 million dollars were provided for the current projects. But government largess of this magnitude is not sustainable, and without it the private sector is unlikely to invest in constructing new plants or retrofitting existing plants.
The Bottomline
Can Mr. Trump revitalize the US coal economy? Maybe, but at best only in the short term and at great cost. If he pursues the CCS option, it will have to be heavily subsidized to encourage private sector participation. But, even if he ignores coal’s large contribution to climate change, he will still find reluctant investors. A tax on carbon emissions – if not in the Trump administration, then in future administrations – imposes a significant financial risk to coal-fired power plants without CCS, one that many investors may not wish to take.
But, more than anything else, wind and solar energy are on a roll, well on their way to becoming trillion dollar sectors of the global economy. Their momentum cannot be stopped, and they will continue to be strong drivers of economic and job growth.
A Final Comment on CCS
I don’t want to leave the impression that I discount the importance of CCS. Quite the contrary. It is an extremely important tool that can be used to reduce CO2 emissions from coal-fired power plants, one that’s particularly important to curbing emissions in developing, coal-rich nations. But, current options are simply too expensive. What’s needed is a concerted and coordinated global effort to develop and implement innovative process technologies that reduce capital and operating costs to levels that encourage private investment without large government subsidies.