Rapid collapse of USA coal holds warning for tar sands

The bigger they come, the harder the fall.

Just a few years ago coal was king in the USA. Bold, multi-billion dollar expansion plans called for more than 150 new coal power plants to be built. Now everything has changed.

A terrific series of articles by the Sightline Institute has tracked the popping of America's coal bubble. Demand has fallen off a cliff. Coal plants are being cancelled and shuttered. Mines are closing. Bond ratings are tumbling. Stock prices for many major US coal companies have plunged 60 to 80 percent in less than two years. Many coal companies now struggle to stay solvent under the huge debt load they piled on when endless expansion was the only accepted narrative.

How much farther could USA coal fall? All the way to bankruptcy, according to a new study by the US Energy Information Administration (EIA). That study shows that if the US adopts even a modest and slowly rising price on climate pollution then the industry would effectively shut down.

To understand how dramatic this freefall has already been, here is one of Sightline's charts.Two factors have created this black swan event.

1: Dirty pollution raises price. Coal is getting more expensive because society is demanding reductions in its dirty pollution. It costs lots of money to capture coal pollution which then raises the cost of burning coal.

2: Cheaper, less dirty, alternatives. Competing fuels like methane (natural gas), wind, geothermal and solar are becoming cheaper and therefore taking over the market.

Factor 1: Dirty pollution raises price

Coal can only compete as an energy source if it is allowed to freely dump a host of nasty pollutants -- like climate pollution (CO2), toxic mercury, sulphur, soot, smog and even uranium. This pollution creates hundreds of billions of dollars in damage by making people sick, destabilizing our climate system, creating acid rain and polluting land, water and food supply.

"Coal kills more people when it goes right than nuclear power does when it goes wrong." -- environmental author George Monbiot

In recent years a broad collection of Americans concerned about the climate shocks, environmental damage and the health crisis caused by coal pollution joined together to pressure the government to reduce coal pollution. For example, New York mayor Michael Bloomberg gave $50 million of his own money to the Sierra Club's "Beyond Coal" campaign.

The US government responded by implementing a series of long-delayed rules restricting toxic mercury, sulphur and CO2 emissions from power plants. The cost to remove these dirty pollutants will raise the price of building and running a coal power plant. The biggest wildcard in the deck is the future cost of dealing with coal's CO2 pollution.

Even though the CO2 regulations won't kick in for years, the handwriting is on the wall for investors to plainly see. CO2 pollution is unlikely to be free much longer. The hoped for solution is to capture the CO2 from the smokestack and store it back underground. This is known as carbon capture and storage (CCS). But despite both industry and government piling billions into CCS projects, most have been abandoned. The reason: CCS costs so much that coal isn't economically competitive if it has to use it. Hello carbon bubble.

By the way, a detailed study by Massachusetts Institute of Technology (MIT) says a similar carbon bubble threatens the Alberta's tar sands. I'll dig into that below…but first back to American coal.

Duetsche Bank summed up coal's dirty pollution dilemma last year saying, coal use in the USA is a "dead man walkin'":

"Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them…And the economics to make it clean don’t work."

Factor 2: Cheaper, and less dirty, alternatives

As burning coal is getting more expensive in the US, its main competitor -- methane -- is getting cheaper. The fracking boom down there has driven methane prices down and cranked up supply.

Importantly for bottom line investors, methane doesn't contain coal's nasty brew of toxic impurities. Using methane means avoiding expensive pollution scrubbers and dealing with lagoons of toxic ash.

Methane emits half as much CO2 as coal when burned. So methane plants will also need CCS in the future. But the CCS costs will be half what they are for an equivalent coal plant. In addition, fracked methane is now so inexpensive that the EIA says it is cheaper to build a new methane power plant with CCS than to build an equivalent coal plant without CCS.  

And it isn't just methane winning the price war. The EIA also says that new coal power plants -- even without CCS -- are more expensive than building wind, hydro and geothermal. In some parts of the USA, new solar, biomass and advanced nuclear plants are now cheaper as well. While the cost of coal is rising, the cost of competitors like wind and solar continue to fall rapidly.

A case study

To give you a flavour of the shifting economics around US coal pollution, here is one of the examples I've been following.

The owners of three coal plants in Maryland spent $1 billion adding new pollution reduction equipment. Then they tried to sell the plants. Investors were watching carefully. In June Bloomberg News wrote an article on this upcoming sale headlined "Coal-Plant Plunge Threatens Billions in Pollution Spending":

"An indication of how much new emissions rules and cheaper natural gas have hammered the value of coal-burning generation will come when Exelon announces the results of the first big sale of U.S. coal-fired power plants in four years.

Exelon, the largest U.S. power company, may have to take a 40 percent discount for three Maryland plants it’s seeking to sell by the end of August. Bidders including NRG Energy Inc. (NRG) have offered $600 million to $700 million for the units, which have a fair value of $1 billion"

Talk about a fire sale. By the time the sale closed in August the price had plunged further. In the end Exelon could only get $400 million -- a whopping 60 percent loss compared to current fair value. In 2008 these three plants would have "fetched $2.5 billion, less any added environmental compliance costs."

No wonder coal company bond ratings and stock prices are cratering.

Coal anyone?

In July, Patriot Coal Corporation went bankrupt. The stock price of US coal behemoth Peabody Energy, "the world’s largest private-sector coal company," has fallen over 60 percent since its high point last year. Another coal giant, Alpha Natural Resources, watched its stock drop 70 percent so far this year. The stock of coal titan Arch Coal shed 57 percent of its value since January.

So, how many investors still want to tie-up billions of dollars in long lasting American coal infrastructure that might not ever make a profit? Not many it seems. More and more investors are deciding to retire existing dirty coal plants rather than spend the money to add more pollution controls.

The Sierra Club's Beyond Coal campaign says that plans for over 150 proposed coal plants in USA have been cancelled. In addition a quarter of the existing coal plants in America have recently announced firm dates for retirement.

The ballyhooed future surge in coal production and coal burning in the USA turned out to be an expensive bubble. Ignoring the economic risk posed by dirty pollution has been a significant factor in inflating this bubble. The question now is just how bad it will get for coal investors.

How low can it go?

In every economic scenario the EIA looked at, coal continues to lose share of USA electricity. No sign of any surge on the horizon. But the real worry for coal investors are the EIA scenarios where the bottom falls out completely: a slowly rising price on climate pollution. Take a look...