New Trump legislation will barely improve outlook of US coal producers

06 April 2017 Consultancy.uk

US President Donald Trump’s drive to deregulate environmental legislation will, contrary to his stated ambitions, barely improve the position of coal producers in the country, writes Joris Govers, a consultant at management consultancy JBR. 

The emphasis of president Donald Trump on the deregulation of environmental legislation ignores the main reason for the precarious situation of coal producers in the United States (US), namely market forces. As a result of the shale gas revolution, the production of natural gas in the US has increased drastically while the price of natural gas for the electric power sector has plummeted. Since most of the coal produced in the US is used for the generation of electricity, these developments have had far-reaching consequences for the demand for coal. Support for the US fossil energy sector through deregulation, however, will boost both coal and shale gas producers and will therefore not significantly alter the current playing field. Additionally, the competition of renewable energy will continue to grow, even without the implementation of the Clean Power Plan. 

Deregulation

President Donald Trump has acted upon his repeated promise during the election campaign to end the “war on coal” in the US. However, the intention to support the entire US fossil energy sector through a far-reaching deregulation of the current environmental legislation means that not only coal producers will benefit, but also shale gas producers. This is problematic because, according to the US Energy Information Administration, the current environmental legislation is not the main reason for the precarious situation of coal producers in the US. The main culprit is increased competition from widely available low-cost shale gas.

US shale gas production & natural gas electric power price

Shale gas revolution

Technological innovations such as hydraulic fracturing and horizontal drilling have led to a significant growth in the production of natural gas trapped in shale rock formations, also known as shale gas. The continuously increasing production of shale gas in the US has led to two important developments. First, the growing supply of shale gas led to a sharp drop in the price of natural gas for the electric power sector. In 2016, the average price of natural gas in the US decreased to the lowest level since 1999. Second, the US is currently in the process of transforming itself into a net exporter of gas. In November 2016, the country for the first time since 1957 exported more gas than it imported. The latter development in particular, is the reason why the large-scale production of shale gas in the US has been referred to as the shale gas revolution. 

Decommissioning of coal plants

On the back of the shale gas revolution, the increased availability of low-cost natural gas has resulted in a growing importance of natural gas in the generation of electricity in the US. Last year proved to be the tipping point; at the end of 2016, the share of gas in the electricity generation in the US superseded that of coal for the first time. This transition was accompanied by the closure of a significant number of coal-fired power plants. In total, some 6.9 GW worth of coal-fired capacity will have been shut down in 2016 alone. Since most of the coal produced in the US is used for the generation of electricity, this transition is having a profound impact on coal producers.US net generation by energy source - Percentage

Export of coal

The decrease in demand for coal in the US was initially offset by a burgeoning export to both Europe and Asia. The declining demand for coal in the US has had a dampening effect on its price. This downward price trend and the significantly higher price of natural gas in Europe made it interesting for the European electric power sector to import coal from the US on a large scale. However, increasingly stringent environmental legislation and incentives for renewable energy have decreased European demand for US coal in recent years. Exports to Asia have also declined due to the slowing of the Chinese economy and increasing competition from coal producers in Australia and Indonesia. Due to the falling exports of coal, the impact of the shale gas revolution is only now being felt. In 2016, both Peabody Energy and Arch Coal, the two largest coal producers in the US, filed for bankruptcy.

US exports of coal (steam en metallurgical)

The rise of sustainability

The declining share of coal in US electricity generation is not completely offset by natural gas, the share of renewable energy has also become more important in recent years. The increase in renewables is due to tax incentives and technological innovations that have led to a sharp reduction in costs of both solar and wind energy projects. This cost reduction is expected to continue and will result in a further increase in renewable generation capacity in the US, even if the Clean Power Plan is not implemented. 

Planned utility-scale generating capacity changes in the US

Conclusion

The main reason for the current position of coal producers in the US is a combination of low natural gas prices, the closure of coal-fired power plants, and the declining export of coal. Deregulation of environmental legislation will not significantly alter these dynamics. In addition to natural gas-fired power plants, renewable energy will start to increasingly compete with coal. The growth of renewable energy is still partly dependent on tax incentives but will become more and more market driven due to further cost reductions. Restoring the dominance of coal therefore seems unrealistic without active market-distorting government support. In a Congress dominated by Republicans, this would seem highly unlikely due to ideological convictions. The importance of such convictions were once again illustrated recently when the American Health Care Act was withdrawn due to a lack of support from conservative Republicans.

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