YOU CAN REACH US VIA EMAIL AND PHONE

NL | EN

Our News

Deregulation will barely improve the position of coal producers in the United States

3 April 2017

By Joris Govers

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.

 

Voornemen Trump helpt kolensector VS amper vooruit
CHARLESTON, WV – MAY 05: Supporters cheer for United States Republican Presidential candidate Donald Trump during his rally at the Charleston Civic Center on May 5, 2016 in Charleston, West Virginia. Trump became the Republican presumptive nominee following his landslide win in indiana on Tuesday.(Photo by Mark Lyons/Getty Images)

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.

 

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.

Deregulation will barely improve the position of coal producers in the United States 7
Source: U.S. Energy Information Administration, “U.S. Shale Production” (December 2016) and U.S. Energy Information Administration, “U.S. Natural Gas Electric Power Price” (December 2016)

 

Decommissioning of coal plants

The increased availability of low-cost natural gas due to the shale gas revolution 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.

Deregulation will barely improve the position of coal producers in the United States 10
Source: U.S. Energy Information Administration, “Monthly Energy Review December 2016” (December 2016)

 

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.

Deregulation will barely improve the position of coal producers in the United States 9
Source: U.S. Energy Information Administration, “Export quantity to total word of All coal 2015” (fall 2016)

* Steam coal is mainly used for generating electricity, metallurgical coal for steel production.

 

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.

 

Deregulation will barely improve the position of coal producers in the United States 8
Source: U.S. Energy Information Administration, “Planned Utility-Scale Generating Capacity Changes by Energy Source 2016-2020” (31 December 2015)

 

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.

 

Read this article on Consultancy.uk