Managing coal’s decline

(Guest column) — Coal is in decline. A decade ago over half of all electric power generation in the United States came from coal. Today, that number hovers just over 30 percent. Last month for the first time since the Energy Information Administration (EIA) began tracking the data in 1973, natural gas overtook coal as the nation’s primary source of energy for power generation.

No one who looks honestly at the future of energy seriously thinks that coal is coming back. It’s not. Investors understand this, which is why coal stocks are tumbling.

Some in Wyoming blame coal’s decline on a mythical “war on coal,” allegedly being waged by the Obama Administration. In fact, coal’s decline reflects simple economics. Producing electricity from new coal plants is more expensive than natural gas and onshore wind even now, long before coal plants will become subject to the administration’s new Clean Power Plan. It is only a matter of time before the price of utility-scale solar energy undercuts coal, too.

Existing coal plants will provide a market for coal for the foreseeable future, but most of these plants are old and the smart economic choice will lead to shuttering these plants rather than paying for expensive upgrades. So there is every reason to think that the current decline will continue.

Coal decline deniers have been looking to Asian markets for salvation. But coal’s decline is not unique to North America. Asian coal prices are so low that it’s hard to see how North American suppliers would make a profit even if they found a buyer. And buyers will be hard to come by given that Australian and Indonesian sellers hold a distinct geographic advantage.

As bleak as it looks for coal today, the prospects for Powder River Basin coal are somewhat brighter at least for the short term. It’s cheaper to produce and lower in sulfur than most other coal. So, the PRB stands a better chance to manage the decline to avoid the worst impacts. But it will be up to the federal government to show the way.

The vast majority of Western and PRB coal is federally owned, so managing coal’s decline in the West falls largely on federal hands. As it happens, the federal government is recognizing these broad structural changes in the coal markets and is holding a series of “listening sessions” this month to solicit ideas for managing what remains of the federal coal estate. I offer two proposals: 

First, the federal government must be proactive not reactive. It ought not simply respond to coal lease applications from whoever and wherever they come, but should instead decide up front how much federal coal it wants to sell and where it wants to sell it given current economic conditions and environmental concerns. In line with coal trends, a cap on future leases should come down over time to allow coal communities to plan for a less coal-dependent future.

The government should make clear that it will not accept coal lease applications unless the operator has a buyer at an existing and viable coal facility over a long term. This is no time to be speculating about illusory markets for coal. The pending lease application in the Alton coal field of southern Utah offers a good test case for seeing whether the government is capable of saying no to an applicant in a remote, environmentally-sensitive region who lacks a clear buyer.

Second, the government should announce that it will not sell federal coal unless it can command a minimum bid price of at least $1 per ton, and unless it can be produced without “royalty relief.” The time for increasing coal royalty rates may be long overdue, but at a minimum the government should make clear that relief from already low royalty rates will not be forthcoming. If we are going to sell the public’s coal, let’s demand a fair return. The spectacle of selling federal coal for a penny a ton and then granting the coal operator royalty relief on top of that must stop.

This will, by the way, place PRB coal in a strong position as it is home to the only federal coal that has produced bids over $1 per ton, and it is also a place where royalty relief is rare.

Coal has been good to Wyoming. It has created jobs, boosted rural economies, and helped fill the State’s substantial Permanent Mineral Trust Fund. But the time has come to plan for a day when coal is no longer a significant economic force in the State. The responsibility for managing coal’s decline in the West falls largely on a federal government that has historically seemed incapable of the task. Let’s use the Department of the Interior’s “listening sessions” and open comment period to demand a fresh start.

— Mark Squillace is a professor of law at the University of Colorado Law School. He taught at the University of Wyoming College of Law between 1984 and 2002.

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