Peabody Energy’s Bankruptcy Filing: Top 4 Things You Should Know

, director of state policy & analysis, Clean Energy | April 13, 2016, 10:34 am EST
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Update (June 13, 2016): Bankruptcy filings of Peabody Energy, the world’s largest investor-owned coal company, reveal extensive funding of climate deception through trade groups, lobbyists, think tanks, and supposedly independent scientists.

Peabody Energy, the world’s largest private-sector coal company, filed for Chapter 11 bankruptcy today. Here are four things you should know about the company’s remarkable collapse and the broader implications for transitioning to a clean energy economy.

1) Peabody Energy’s downfall is symptomatic of much more expansive coal industry woes.

Just five years ago, Peabody Energy led the U.S. coal industry with a market capitalization value of nearly $19.7 billion. Since then, Peabody’s market value has fallen by a whopping 99 percent and today stands at approximately $38 million as the company scrambled to sell off assets in recent weeks in an attempt to avoid bankruptcy. Having failed to do so, Peabody Energy now joins a long list of bankrupt coal companies—including 3 of the top 4 U.S. coal producers.

Indeed, Peabody Energy’s situation is not unique as the entire coal industry is showing signs of serious stress. Total US coal production in 2015 was 10 percent below 2014 levels and 24 percent below the record high in 2008. In fact, you would have to go all the way back to 1986 to find a year in which less coal was produced than in 2015.

The sharp decline in coal production is directly correlated to less demand from the industry’s largest customer—the electric power sector. Coal-fired power plants supplied half of total US electricity needs as recently as 2008, but in 2015 coal’s share was just 34 percent—an historic low that barely outpaced natural gas as the nation’s top power source.

Signs of a recovery for coal producers are nowhere to be seen. The U.S. Energy Information Administration projects another 16 percent decrease in US coal production this year. And other experts are even suggesting that the drop in coal demand is “irreversible,” as structural changes in the power sector are permanently altering the coal industry’s market.

2) Poor business decisions and a ‘perfect storm’ of market and policy factors are driving the coal industry’s precipitous decline.

Peabody Coal executives and many other coal supporters are constantly trying to pin blame for the industry’s problems on President Obama and the EPA’s Clean Power Plan. But that’s a smokescreen that doesn’t stand up to scrutiny. The truth is, of course, significantly more complex than that.

Much of the responsibility falls squarely on Peabody Energy and the many other coal producers that made serious miscalculations in the global demand for metallurgical (met) coal, which is used to produce steel. Anticipating significant growth in the global demand for met coal, especially from China, Peabody Energy and its competitors took on huge loans in 2011 to acquire new coal reserves. But those investments didn’t pay off as China’s economy—and demand for steel—declined and the market price for met coal, historically more valuable than the thermal coal used in power production, plummeted. These events have saddled Peabody Energy with big debts and little means to generate the revenue needed to pay them down.

A combination of other market and policy factors are also creating stiff headwinds and exacerbating the coal industry’s poor economic decisions. Such factors include:

  • Mounting coal-fired power plant retirements. The US coal fleet is aging, inefficient, and increasingly uneconomic. As a result, many coal generators are facing retirement. At least 370 coal generators in 39 states—representing more than 65,000 MW of coal power capacity—have either retired since 2012 or are scheduled to close through 2030.
  • Persistently low natural gas prices. Natural gas prices are at historic lows, due largely to advances in hydraulic fracturing and horizontal drilling techniques that have increased accessibility to natural gas reserves and driven up production. Low prices have caused power producers to turn to natural gas to generate electricity at an unprecedented rate.
  • Rapid growth in renewable energy. Significant cost declines, advances in technologies, and state policies are accelerating the growth of wind and solar resources nationwide. This trend is set to accelerate with the 5-year extension of the production tax credit (PTC) for wind and the investment tax credit (ITC) for solar, adopted by Congress at the end of last year.
  • Slow growth in power demand. Increasing investments in energy efficiency is helping to curb the demand for new power generation. For example, state efficiency programs provided annual electricity savings equal to 0.7 percent of total electricity sales in 2014, up 6 percent over 2013 levels.
  • Tighter clean air, clean water, and public health standards for the US power sector. After decades of delays, the EPA is working to implement and enforce environmental and public health standards for power plants, including implementation of the Mercury and Air Toxics Standard and the forthcoming Clean Power Plan to limit carbon emissions.
  • A global commitment to curb global warming emissions. Last December, 195 nations came together in Paris and made an historic commitment to limit the increase in global temperatures to well below 2°C above pre-industrial levels. The Paris Agreement provides a clear signal to governments, businesses, and investors worldwide to move swiftly toward economies based on low-carbon energy sources.

3) Bankruptcy must not absolve Peabody Energy of its social and environmental responsibilities.

Filing for bankruptcy does not mean Peabody Energy is going out of business. More likely, the company would use Chapter 11 protection to unload bad investments and restructure its debts so they can be better managed over the long-term.

As part of that process, Peabody Energy must be compelled to uphold its responsibilities to those most directly impacted by the company’s actions, namely its employees and the surrounding communities where it operates. That includes the promises Peabody Energy made to its retirees. Only a few months ago, the company reached an agreement with the United Mine Workers of America to support retirees from its twice-bankrupt spinoff company, Patriot Coal.

Peabody Energy’s responsibilities to the communities around its mines further extends to ensuring funds are available to fully clean up those mines once they are closed. And as my colleague Kathy Mulvey writes, emerging from bankruptcy Peabody Energy should make several changes to take greater responsibility for its role in climate change and climate science denial.

4) Which energy sources replace coal matters greatly for consumers, public health, and the climate.

Solar on roof - NREL

Photo Source: National Renewable Energy Laboratory

The decline in Peabody Energy’s market share and the coal industry in general creates new growth opportunities for other energy sources. Many utilities are now choosing to replace coal with natural gas for meeting electricity demand. From 2007 to 2015, as coal’s share of the power supply declined, the contribution from natural gas increased from 22 percent to 33 percent. While this shift offers near-term benefits, strong evidence suggests that an over-reliance on natural gas poses significant risks, including price volatility, rising global warming emissions, and contamination of drinking water supplies from natural gas production.

Fortunately, prioritizing the deployment of renewable energy and energy efficiency as a replacement for coal in our power supply avoids many of the dangers of an over-reliance on natural gas. Investments in these technologies are already accelerating nationwide, demonstrating that they can deliver affordable and reliable power.

With stronger state and federal policies in place, including renewable electricity standards, energy efficiency resource standards, carbon pricing programs, tax and other financial incentives, and a national power plant carbon standard, renewables and efficiency can thrive as we transition to a truly clean energy economy.

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  • Denise

    Peabody might have well blamed the laws of physics for their downfall.