King Coal's Stages of Grief, Part 2: Financial Risk and the Economics of Coal

July 10, 2015 | 8:25 am
Jeremy Richardson
Former Contributor

This post continues my series on King Coal’s Stages of Grief, and focuses on more denial—this time about economics. Yesterday the U.S. Energy Information Administration (EIA) noted that the production of coal from mountaintop removal (MTR) mining has decreased by 62 percent since 2008. And last month, Bank of America released its new Coal Policy, committing to phasing out financial support for mountaintop removal coal mining. Its new policy states that the bank “will continue to reduce our exposure to coal mining companies that utilize MTR practices in Appalachia.” The new policy represents a huge win for activists in the region fighting against the devastating practice. Certainly a step in the right direction, but I’m guessing that not everyone was celebrating.


This post is the second in a series on King Coal’s Stages of Grief: Facing a Changing Future.

Job losses

I suspect that coal miners across the region are not celebrating the Bank of America policy change, if they’re even paying attention. Back home, people are understandably more worried about the massive job losses that have rocked Coal Country over the past few years—and how to pay the bills. For many, it’s easier to blame environmentalists and regulations for the job losses than to face the deep and fundamental changes affecting the industry. (I’ll turn back to the critical issue of job losses in a later post in this series.) Much has been written about the headwinds facing the coal industry, but it’s worth highlighting a few points here.

Natural Gas

Simply put, coal’s fundamental economic problem is the rise of natural gas. The proliferation of hydraulic fracturing, or fracking, has pushed natural gas prices to historic lows. The cost of fuel has helped push utilities away from coal and toward natural gas generation. Case in point: Southern Company in 2010 generated 53 percent of its power from coal and 29 percent from natural gas; in 2013 their split was 37 percent coal and 42 percent gas. Southern reflects the national trend: in 2008 about 48 percent of our electricity came from coal and last year just under 39 percent came from coal.

Data Source: Electricity Data Browser, Energy Information Administration

Source: Electricity Data Browser, Energy Information Administration

UCS has reported on the economic vulnerability of coal-fired power plants, most recently in the 2013 update to our Ripe for Retirement report. We noted that the falling cost and increased deployment of renewable energy like wind and solar is now competing with coal generation. See also our recent report on the risks of an overreliance on natural gas.


The EIA announcement on declining MTR coal production noted above is well worth a quick read. While MTR production has declined by 62 percent since 2008, total U.S. coal production has declined by 15 percent over the same period. A mix of causes is to blame, according to EIA:

Lower demand for U.S. coal, primarily used to generate electric power, driven by competitive natural gas prices, increasing use of renewable generation, flat electricity demand, and environmental regulations, has contributed to lower U.S. coal production.

Central Appalachian coal, which comes almost entirely from southern West Virginia and eastern Kentucky, along with a small amount from southwest Virginia and Tennessee, faces an additional set of challenges. Namely, as a Downstream Strategies report made clear a few years ago, the highest quality and most accessible coal has already been mined and burned. What’s left is getting harder—and therefore more expensive—to mine. Labor productivity for coal mining, measured in short tons of coal produced per miner hour, has declined nationally from 2000 to 2012, but the worst declines were in the Central Appalachian region.

The current economic challenges facing Central Appalachian coal should come as no surprise. In its 2001 update on Appalachian coal reserves, the United States Geological Survey (USGS) concluded that:

Sufficient, high-quality, thick, bituminous resources remain in (major Appalachian) coal beds and coal zones to last for the next one to two decades at current production. After these beds are mined, given current economic and environmental restrictions, Appalachian basin coal production is expected to decline.

And, here we are today, in 2015, in the midst of that decline.

Data Source: Coal Data Browser, Energy Information Administration

Source: Coal Data Browser, Energy Information Administration

As I often say, geology wins in the end—this is the nature of a nonrenewable resource.

Coal Markets

Central Appalachian coal is in particularly bad shape economically, unable to compete with other coal mining regions in the U.S. like the Powder River Basin and the Illinois Basin. But surely the coal industry is faring better in other parts of the country, right? Well, not exactly.

Peabody Energy, the largest private-sector coal company in the world, runs coal mines in the West and Midwest regions of the U.S. as well as in Australia. The company’s most recent earnings report offers a glimpse into the declining state of coal markets around the world. Notably, Peabody is losing cash on every ton of coal sold in Australia, as highlighted by this good rundown of the company’s first quarter financials. The company not only expects domestic coal demand to drop by 10 percent this year compared to last year, but also sees seaborne exports falling materially this year.

And it’s not just Peabody. The Carbon Tracker Initiative highlighted the fact that the U.S. coal industry has lost 76 percent of its value in the last five years. Some financial analysts have concluded that the U.S. coal industry is in terminal decline, with 26 companies going bust in just the last three years. Just a few weeks ago, Patriot Coal filed for bankruptcy protection for the second time in three years, citing the slump in the price of coal and poor prospects for raising capital. And more bankruptcies may be on the way. Arch Coal, for example, fell out of compliance with New York Stock Exchange rules last month, after its share price failed to close at $1 per share or above for 30 consecutive days.


Supporters of the coal industry often tout the need for cheap electricity, both here at home and abroad. But here’s the thing: coal is not cheap. That’s because of what economists call “externalities”—all the damages and costs incurred by mining, transporting, burning, and cleaning up after coal, many of which aren’t included in the prices we pay for electricity, but are nonetheless borne by society at large.

In the context of climate change, we talk about the social cost of carbon, a way to measure the damages caused by carbon emissions in the form of climate impacts. A new study has estimated costs of various types of air pollution to public health and climate, finding that coal-fired generation costs an additional 24 cents per kWh, under conservative assumptions. Or, in the words of the study’s author,

“These results suggest that total atmosphere-related environmental damages plus generation costs are much greater for coal-fired power than other types of electricity generation…”

The impacts from MTR in particular are potentially even more devastating. West Virginia is now initiating an evaluation of the multitude of health studies that have found increased risks of serious illness and even premature death for people living near MTR sites. UCS has long advocated for policies that account for these externalities, specifically advocating a ban on MTR and the need for tougher mine safety standards. In our 2008 report, Coal Power in a Warming World, for example, we recommended that policymakers:

Adopt statutes and stronger regulations that will reduce the environmental and societal costs of coal use throughout the fuel cycle. Our use of coal, from mining through waste disposal, has serious impacts on the safety and health of both humans and our environment. Policies are needed to reduce these impacts and place coal on a more level playing field with low-carbon alternatives. This would include a ban on mountaintop removal mining and tougher standards for mercury emissions, mine safety, and waste disposal. Any federal policy that promotes coal use, including ongoing or expanded CCS subsidies, must be accompanied by such measures.

Corporate Risk

Bank of America’s policy change focuses on MTR in particular, but in general, companies are increasingly concerned about risks from climate change. They are also responding to various shareholder resolutions and pressure to be more environmentally conscious. And then there’s an entire movement of young people pushing for universities to divest from fossil fuel investments.

What Now?

My point here is that the world is moving away from coal as a fuel source. Mind you, coal will continue to be mined in Appalachia and elsewhere for decades—it remains critical not only to producing electricity, but also to making steel. But it should be clear from this post that the transition is well underway. The question for coal communities is how to reinvent themselves for the future. And fortunately there is great potential, which I will explore in future posts.