Simply put: coal production costs are getting more expensive. But why?

Coal companies are facing increased competition from energy sources like natural gas and renewables. Anticipated federal regulations also have the industry tightening its belt.

In 2000, coal costs averaged $1/MMBtu (million metric British thermal units – a measurement of heat energy). With coal being so inexpensive, it did not matter if natural gas prices sank to $4 or $3. However, with the vast expansion of natural gas supply due to hydraulic fracturing, in today’s market, natural gas prices have actually rebounded to $2.30/MMBtu while the US Energy Information Administration estimates delivered coal prices to be near $2.20/MMBtu.

natural gas pricesNow, $2.20 is less than $2.30 – so why is coal getting the cold shoulder? There are several reasons:

  • Currently, gas-fired generation plants are smaller and easier to finance than coal plants. Hence, they are in a better position to fit into the grid and supplement increasing amounts of highly variable renewable sources.
  • Coal beds are thinning out. This means coal production companies have to dig deeper and mine more rock to get the coal, thereby increasing production costs. Equipment wears out faster and deeper mines mean higher fuel costs both for both production and transportation.
  • Finally, and possibly most telling for the coal industry, is the US Environmental Protection Agency’s Clean Power Plan, announced in August 2015. These rules were set into motion to reduce, on a state-by-state basis, the amount of greenhouse gases (GHGs) the nation’s electric power sector emits. Coal production and usage is a significant contributor to GHG emissions and will be significantly impacted by this plan.

Transitioning from high-carbon to low-carbon

Electricity production accounted for 30 percent of GHG emissions in the US in 2014—with coal being the largest producer of these emissions. Natural gas emits about half the GHGs coal does during combustion.

Last yearUS GHGs by Sector the US electric power sector’s CO2 emissions were 1,925 million metric tons, or about 37 percent of the total US energy-related CO2 emissions of 5,271 million metric tons. Of those 1,925 million metric tons, 71 percent (1,364 million metric tons) were from coal, compared to 28 percent (530 million metric tons) from natural gas.

To fall in line with Clean Power Plan directives, coal plants need to curb carbon emissions by 32 percent by 2030, compared to 2005 levels. That’s no short order considering that carbon capture and storage (CCS) comes with a steep price tag, in the range of hundreds of millions of dollars. Even with that investment, according to the Global CCS Institute, coal with CCS is a mid-range technology in terms of cost when compared against a range of low-emissions technologies.

With major US coal companies filing for Chapter 11 bankruptcy (Arch Coal filed in January 2016; Peabody followed in April), it is no big surprise that utility and energy production companies are ditching coal and opting to both retrofit their operations for gas production and increase investments in renewables.

“The costs for retrofitting a coal-fired power plant for CCS are high and the process can be difficult. Many electricity generators have opted for more economical options – either converting their coal-fired plants to natural gas or simply shutting down coal plants and building more efficient and high capacity gas-fired plants,” states Mike Jarmus, Senior Analyst for The Martec Group.

Energy companies that have historically relied on coal are making the switch nationwide:

  • Duke Energy has committed a total of $7 billion to renewable energies.
  • DTE Energy is retiring 11 of its 17 coal units and replacing those with wind, solar and natural gas.
  • AEP is dramatically increasing its renewable portfolio with a $15 billion investment.

And that is just to name a few. The end may be just around the corner for the coal industry… an industry that literally powered the US through the 20th century. In the near future, the proverbial “light at the end of the tunnel” will no longer be powered by coal but by natural gas, wind or solar.

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