Coal’s Accelerating Collapse
March 29, 2016
If coal giant Peabody goes down, as seems increasingly likely, the investment community’s orderly retreat from Coal may turn into a rout.
The grave environmental damage from coal-fired power plants has done nothing to deter the Senate majority leader, Mitch McConnell, from decrying a “war on coal” and orchestrating his own war against the Obama administration’s climate change agenda. But he and other coal-state Republicans would be foolish to ignore the growing consensus on Wall Street that King Coal, for all its legendary political power, has turned into a decidedly bad investment.
JPMorgan Chase announced this month that it would no longer finance new coal-fired power plants in the United States or other advanced nations, joining Bank of America, Citigroup and Morgan Stanley in retreating from a fuel that provides about one-third of the nation’s electricity and accounts for about one-quarter of the carbon emissions that feed global warming.
Cleaner and cheaper natural gas is fast becoming the preferred investment, a blunt marketplace reality that is sure to weaken coal’s grip on the planet as much as moral and environmental concerns. Last week’s announcement by Peabody Energy, the world’s largest private-sector coal company, that it may have to seek bankruptcy protection, just as three other major coal producers have done recently, provided a dramatic confirmation of this trend.
Main Street also seems to be getting the message. Two weeks ago, Gov. Kate Brown of Oregon signed ambitious legislation — agreed to by environmentalists, consumer groups and power producers — that requires the state’s two largest utilities to stop importing out-of-state coal-generated power by 2030 and to use renewable energy to meet half of the demand of their customers by 2040. Oregon’s only in-state coal-fired plant will close by 2020.
The campaign to convince investors to divest from fossil fuels has picked up steam in the past two weeks, thanks to the imminent bankruptcy of one major old-line energy company.
Peabody Energy, the world’s largest privately-held coal company, signaled on March 15 that it may seek bankruptcy protection in order to restructure its skyrocketing debt.
Peabody is not just your ordinary coal company — it is one that has steadfastly refused to incorporate the findings of mainstream climate scientists into its business planning, and may now be suffering as a result.
A Peabody bankruptcy would follow the bankruptcy of several other large coal companies, including Alpha Natural Resources and Arch Coal.
Coal is facing one of the worst downturns in its history, as coal-fired power plants have been idled or converted around the country due to the increased domestic production of natural gas.
In addition, public policies have favored a shift to lower carbon fuels.
Plus, China’s demand for U.S. coal for use in steel manufacturing has fallen significantly as its economic growth has sputtered.
Peabody’s plight is being used as a case study by climate activists who are seeking the removal of fossil fuel companies from the investment portfolios of universities, religious institutions and state pension funds, among others.
The potential bankruptcy, activists argue, demonstrates that fossil fuel investments are a risky bet.
“A Peabody bankruptcy will be like rocket fuel for the divestment campaign,” said Jamie Henn, a spokesman for the environmental group 350.org, in an interview.
“It gives students and pension holders a new reason to go back to their boards and ask, ‘Are you holding this stock? What about other fossil fuel companies?'”
A recent report from the consulting firm the Rhodium Group backs up the contention that investing in fossil fuel companies may be more risky than ever before, at least when it comes to coal.
A Rhodium report released in February, for example, found that the four largest American coal miners by output, Peabody Energy, Arch Coal, Cloud Peak Energy and Alpha Natural Resources, which account for nearly half of US production, were worth a combined $34 billion in 2011.
Today they are worth just $150 million, which is less than the value of the online marketplace Etsy, which is worth on the order of about $900 million.
Peabody has informed the U.S. Securities and Exchange Commission that its ability to operate as a “going concern” is now in question, which is accounting-speak that means it may not be possible for the company to continue to operate as currently structured.
“To me saying this is a war on coal is saying the Internet is a war on typewriters,” said Bob Keefe, executive director for E2, a partner of the Natural Resources Defense Council. “The fact of the matter is that the energy business … is in transition. The good news is that like any major industry transition, we’re seeing a lot of progress”—specifically, the addition of 250,000 clean energy jobs in the last four years.
Renewable energy is also getting cheaper, leading to an expected 8 percent increase in renewables this year. “The ‘war on coal’ is being driven by lots of different dynamics including a huge drop in the cost of renewables and then obviously to an extent the drop in price in natural gas in the United States,” said Jake Schmidt of the NRDC. It has become economically rational “to shift away from coal to one of these sources and a lot of companies are choosing natural gas.”
To keep that edge, Keefe says the Clean Power Plan will have to move forward. Obama’s decision this week to limit methane leaks on existing oil and gas wells will also be key. For natural gas to provide a bridge to renewables, drilling practices will have to be regulated and standardized to avoid flack from critics who say natural gas is nearly as destructive to the environment as traditional sources of energy.
In the presidential election, the candidates’ stances on coal and diversifying energy have been important on both sides of the race. Bernie Sanders has been able to maintain his anti-coal stance while drawing support from coal country. Hillary Clinton, for her part, has had a tougher time. This week, the Democratic frontrunner said she’s going to “put a lot of coal companies and coal miners out of business.” In the same breath, she clarified that she wanted to buoy coal miners who have worked to power the country. Still, Republicans like Mitch McConnell seized on the comments, calling them “callous.” Politicians in coal-dependent West Virginia were appalled. Clinton walked back her comments, saying, “Coal will remain a part of the energy mix for years to come.” Days later, she was able to pull out a victory in Ohio coal country.
Republicans coined the phrase “war on coal” as a pejorative way to describe Obama’s regulatory policies. This year’s presidential race has continued that belligerently pro-coal approach. Trump has been particularly outspoken, calling Obama’s war a job killer, and he has raked in coal country votes and support for his efforts.
But according to Keefe, rhetorical assaults designed to boost coal are a waste of time. “If I’m a coal state politician, instead of harping about some other party’s ‘war on coal’ I would be trying my best to help those workers,” he said. “Getting them some worker retraining programs and more importantly getting more clean energy … in my state.” Clearing the way for budding renewables programs will help to ease the absence of coal across the country. Nevada has faced what Keefe calls a “solar debacle,” thanks to regulators dumping extra electricity costs on solar users, and North Carolina and Florida have seen similar struggles. Sorting out these regulations will take some pressure off natural gas.
International markets are also catching on. Though coal is still the world’s largest fuel source, 2014 showed the first decline in its consumption since the 1990s. The International Energy Agency expects consumption growth to continue, but it will be more measured.