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Notes on the EPA’s Clean Power Plan (Part 2: A Negligent Industry)

December 01, 2015
Tom Sanzillo

Sift through the coal industry’s filings in the docket of the EPA’s Clean Power Plan and the central complaint you find is that the plan supposedly brings the industry undue harm. It argues that it hasn’t had enough time to get ready for something that’s been a long time coming and that some imagined uncertainty in the process is hobbling their ability to invest. Beyond these procedural points, the coal industry says it sees many more coal plants closing as a result of the plan while other segments of the energy sector are benefiting. Not fair.

In 1990, the Intergovernmental Panel on Climate Change was established, and since then there have been international agreements and summits that pointed toward inevitable energy-market reform. Closer to home, from 2008 through 2010, the U.S. had a robust discussion around climate change policy that ended in Washington failing to pass a climate bill.

Since 2005, when plans to build 150 new coal plants were announced, very few have been built and in fact, a total of 183 new coal plant proposals over the past several years have been cancelled. That’s almost 400 million tons of coal demand that was supposed to materialize and did not, and that trend became deeply rooted longer before a Clean Power Plan was ever written.

What’s left coal-generation-wise in the U.S. today is an aging fleet that needs replacement. Much of the public discussion around coal plant cancellations has stemmed from rising construction costs, and most of the cancellations hinged on climate change concerns and other environmental problems. The coal-fired electricity industry, in other words, has been in decline for a long time, yet the coal industry acts like its main problem is the Clean Power Plan being implemented now by the EPA.

In 2007, one leading coal consultant made it clear that policy changes driven by climate issues were coming and that they would be mandatory. We’ve noted before that the industry has provided no leadership on the energy-innovation front—the industry has contributed nothing toward a solution to the climate problem.

When a party is notified repeatedly that it must change its behavior and it does not, it is being negligent. Those who are negligent are poorly positioned to claim harm.

AS FOR THE CLEAN POWER PLANT CAUSING MORE PLANT CLOSURES, AND THUS HARMING THE COAL SECTOR’S MARKET POTENTIAL, a reality check is in order. Natural gas prices have dropped considerably, renewable energy costs are way down, and neither of these trends are going away any time soon. Coal industry finances are in a state of collapse due to an already well-established inability to compete. The Clean Power Plan lays out a path for a smaller coal industry, a path that is already being pursued by the market’s abandonment of new coal plants and that is already being illuminated by market signals that a large number of old coal plants are a losing proposition on cost, location and size.

Dallas-based Luminant, a subsidiary of the bankrupt Energy Futures Holding (EFH), which once portrayed itself as a leading player in the nation’s green energy future, is now defending the continued use of old coal plants that burn lignite. It does so even as Texas widens its market share as the leading source of U.S. wind generation.

And Peabody Energy goes out of the way to point out that on the day the Clean Power Plan was introduced its stock lost $90 million of its value. And while it rebounded rather quickly from that loss, overall it has dropped 95 percent of its value over the past four and a half years, shedding market capitalization at the average rate of $12.4 million per day from when its total market capitalization stood at $19.4 billion in 2011 (it’s about $200 million now).

The day the climate bill was defeated in 2010, Peabody’s stock rose briefly and then sank back down by the end of the month—the point being that regulatory issues aren’t what are hurting Peabody or the rest of the coal industry. The fundamentals are the problem: declining prices, rising costs, too much debt and tight margins.

The coal industry does not need more time to plan. It needs a price increase —it’s probably not going to get one. The cumulative hurdles facing the industry are much bigger than just regulations and the Clean Power Plan is only one obvious example of an industry lacking preparedness.

Tom Sanzillo is IEEFA’s director of finance.

Next week: The power of innovation, and how change might affect coal workers

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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