IEEFA U.S.: Spate of coal bankruptcies raises risks for utilities – may hasten more plant retirements

The chaotic collapse of Blackjewel and the unexpected closure of its mines in both the Powder River Basin and Appalachia, as well as a spate of other recent coal-mining bankruptcies, should serve as a wake-up call for utilities dependent on coal-fired generation.

Coal companies serving the electricity supply sector are barely treading water while falling costs for wind, solar and fracked gas have seriously eroded, if not eliminated entirely, their ability to raise prices. Pressure on coal companies, in turn, raises risks for the notoriously risk-averse utility sector: Will their contracted coal supplies be delivered? And at what cost?

Given the speed of the coal industry’s decline, it is unlikely these risks have been built into utilities’ long-term evaluations of their generation asset mix—but they need to be. These evaluations, or integrated resource plans, are primarily based on basic economic factors like fuel costs, operation and maintenance costs, the age of generating units, and the demands of regulatory requirements. Not as easy to calculate are the impacts of financial mismanagement and bankruptcy by key suppliers, let alone how the effects of the overall restructuring of the coal mining industry might play out.

Yet the costs of these risks are very real. Power generation is intensely competitive, where pennies per megawatt-hour can make the difference between a plant being profitable or uneconomic—and unexpected interruptions in coal supply or changes in price can quickly affect both the short-term use and long-term viability of a plant.

THIS APPEARS TO HAVE BEEN EXACTLY WHAT HAPPENED AT THE COAL-FIRED COLSTRIP POWER PLANT in Montana. Units 1 and 2, built in the mid-1970s with a combined capacity of more than 600MW, were originally expected to run at least into the 2030s. Then, in 2016, just as Washington State and Oregon began pushing for an exit from coal power, a settlement was reached with the owners to close the units in the summer of 2022. But the only supplier to the plant, Westmoreland Coal, went bankrupt last year, emerging in March under new ownership as Westmoreland Mining and expressly stating its determination to fight for a higher price for its coal. Instead of agreeing to pay more for coal, however, the owners of Colstrip 1 and 2 decided to shut the units down this year—three years ahead of schedule.

In the Powder River Basin, Cloud Peak and Blackjewel have followed Westmoreland into bankruptcy, and the two largest miners nationally and regionally, Peabody Energy and Arch Coal, have announced a plan to merge their mines in the western U.S. in a joint venture aimed at keeping them economically viable. Each of these announcements has brought ever greater uncertainty to a region that produced more than 40 percent of U.S. coal in 2018—and uncertainty to the utilities that rely on that coal.

UTILITIES AND OTHER POWER PRODUCERS TEND TO BE AMONG THE MOST RISK-AVERSE BUSINESSES, not least because they are expected by their customers and by regulators to deliver an uninterrupted supply of electric power, and by shareholders and other investors to deliver steady, reliable returns. To achieve such reliability, these companies go to great lengths to avoid uncertainty, spending a lot of time on advance planning.

Many were reluctant to add gas generation during the period of generally high and volatile prices in the 2000s, until it became clear about a decade ago that the fracking revolution was likely to boost production and lower prices over the long term.

Now, coal mining is going through an increasingly risky downsizing, as coal plants are retired or run less frequently, and as no new plants are being built. Coal consumption in the U.S. this year will have fallen by about 450 million tons since its 2007 peak, to about 590 million tons, according to the latest estimate from the Energy Information Administration. The retirement of more than 100 more coal-fired units has already been announced for the next decade, so that decline is expected to continue.

The resulting restructuring on the supply side has led to ever weaker and more precarious finances. With lower consumption and fickle export markets, a number of coal companies are unlikely to survive, and some mines will close permanently. Blackjewel’s sudden shutdown demonstrates just how unpredictable the process can be and how uncertain the outcomes of the Cloud Peak and other coal company bankruptcies remain.

At the moment, the Blackjewel coal supply disruption to plants can almost certainly be covered by some combination of stockpiles, replacements from other mining companies, and possible shifts in the generation mix. However, this experience in the midst of the high-power-demand summer period, and the possibility that such disruptions may become more common in the future, will probably magnify doubt among utility companies as well as among grid operators about holding onto coal-fired assets.

The utility industry seems to be facing a sobering, coal-themed version of musical chairs, where the last utilities to operate coal-fired power plants may experience the greatest coal-supply risks. In such a risk-averse industry, this is likely to push some utility executives to speed their companies’ transition away from coal.

Seth Feaster is an IEEFA data analyst.

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