Donald Trump has made “bringing back” coal one of his signature issues. In support of this goal, Trump has pulled out of the Paris agreement on climate change, destroyed the Clean Power Plan created under President Obama, removed regulations that protect streams and rivers from mining waste, weakened regulation of coal ash impoundments despite a string of disasters, and is even planning to allow coal plants to dump tons of additional mercury into the environment. Despite all this 2018 was another record year for coal power plant closings. Trump’s actions have been effective at one thing — allowing mine owners to maximize profit per ton. Meanwhile, the number of mining jobs is falling along with the demand for coal in the United States. On every other front, Trump’s actions have been both ineffective and actively destructive. But there’s a very real reason why the government may soon have to intervene in the energy industry to provide genuine protections for the coal industry — and it has little to do with saving the 52,600 remaining coal jobs.
The reason the government have have to step in—hard—has to do with how coal companies operate and are financed. While most people’s idea of coal mines is men going underground at a shaft or slope mine in Appalachia, the ten largest coal mines in the United States are all in the West. Nine of those ten are in Wyoming. They are all surface mines. They mine coal beds that are sometimes as thick as 100’ under relatively shallow conditions. They are massive—massive—operations, with the largest capable of producing more than 100 million tons of coal in a single year. If that number doesn’t sound big enough on its own, the Great Pyramid has a weight of around 5.8 million tons. So … better than 17 Great Pyramids a year. And there’s another mine right beside that one that is just as big. Together, these mines essentially are the steam coal industry in the United States.
Operating those surface mines is utterly dependent on leveraging the value of the coal that is still in the ground. But with projected demand still falling and the cost of building wind or solar facilities dropping below the cost of simply operating existing coal plants there is a crisis on the horizon. The value of coal in the ground is rapidly approaching zero. The companies that depend on that value to finance their operations are poised on a knife edge.
This situation makes it extremely likely that the coal industry is about to fail, spectacularly, in an uncontrolled death spiral that could happen much more quickly than replacement capacity can be brought on line.
In normal operations, these large surface mines work by making long passes—as long as the permit boundaries allow—cutting a trench several hundred feet wide and a couple of hundred feet deep. Explosives break up the material above the coal. A massive 15-story-tall dragline moves the bulk of the “overburden” above the coal, large shovels, bulldozers, and a fleet of massive trucks (carrying up to 400 tons each) move the overburden around while other shovels and trucks remove the coal. They go as far as they can, then they turn the whole traveling circus around and run it the other way. The back and forth generates a mine plan that looks something like this.
The value of the coal still in the ground is determined by a number of factors including its quality, any long-term contracts, depth of recovery, and other costs. It’s also heavily affected by just when it’s expected to come out of the ground. Coal that’s being mined next month is worth more than coal that will be mined next year, and that coal is worth more than the coal slated for three years down the lines, and so on. That’s because those future sales bring with them an increasing level of uncertainty. Until 2008, the market for coal was growing steadily every year, so that system worked wonderfully. When calculating the net worth of coal companies, reserves in situ could confidently be valued with numbers similar to, or even greater than, the sales going out the door. Those tens or hundreds of millions of tons still in the ground represented billions in revenue, hundreds of millions in profit.
The average ton of coal in the Powder River Basin in 2016 sold for around $13. If each one of those monthly blocks represents ten million tons of coal, that’s $130m in revenue for each one of those monthly blocks. Over a billion and a half under each one of those annual blocks. That … is a lot of revenue.
As with many industries, coal companies leverage the promise of future sales to cover current expenses. That’s particularly true for covering long-term obligations like pensions and the largest expense for most surface mines, reclamation bonds. And why shouldn’t they? Those billions still under the dirt allowed them to buy more equipment, more property, more reserves. So long as demand was steady or increasing, the coal mined could fuel power plants, but the coal yet to be mined served a purpose too — it fueled coal companies.
When companies open a coal mine, they are obligated to show that they have set aside adequate funds for meeting obligations to reclaim land damaged in the process of mining. Most reclamation work on surface mining is very well done, and meets standards that Trump has, so far, not significantly degraded. It’s also expensive. (Note: This doesn’t apply to mountaintop removal or contour strip operations in Appalachia, where reclamation is, to put it mildly, a joke.) In fact, the requirements on surface mining for most states have long ago been turned over to the states. These states with “primacy” set their own rules, with the federal rules representing just a baseline. The states also determine the obligation of coal companies to put up funds for future reclamation needs. That limits Trump’s ability to do anything about their most critical long-term requirement.
A new coal company starting up is often required to buy what amounts to an insurance bond, guaranteeing that they’ll set aside funds for reclamation. Until recently, large established companies have allowed to “self bond.” That is, they guarantee to meet the requirements based on documents that point back to their own net worth and projected revenue. But that $12 coal from the Powder River Basin was $13 coal in 2017, and it was $13.75 in 2016. Through most of 2018, prices have been flat — but there’s no reason to believe this will continue. Coal companies are certainly praising the current cold snap in the East for a temporary boost in demand … but it’s just a slightly less step point on a declining curve.
Those reserves that are setting out there under blocks to be mined in 2020, and 2025, and increasingly distant years are declining in value much more steeply than the coal that’s going out on train cars now. Because the market for coal in 2020, and 2025, and beyond looks exponentially worse than the current market. In fact, the value for coal in the ground is moving rapidly toward zero.
Which means that the biggest portion of the book value for coal companies is evaporating. Even the largest companies, those still able to produce coal and compete in a market where there is vast overcapacity,
Every coal company out there, even those whose book value is considered to be massive, is a paper tiger whose value could disappear in a puff of accounting smoke if challenged. And every coal company out there, especially the large ones, could easily find that even then they are still selling millions of tons, the revenue streams are not close to enough to fund their obligations. That’s even true for companies that — like three out of the four largest in the US — who had reorganized under bankruptcy in the last five years specifically to offload many of those obligations.
Even states like Wyoming whose every public service is utterly dependent on the revenue that comes from coal mining, have started to realize that they are facing imminent collapse of the ability of coal companies to cover their bond obligations. Bills are advancing, in Wyoming and elsewhere, that would place severe limits on the ability of coal companies to self-bond. To force them to put up or shut up. And they have no choice but to shut up.
There is a possibility that the industry will collapse neatly. None of these large mines is currently operating at capacity. In a declining market, they bump against each other, trying to land contracts on a market that’s increasingly unwilling to make long term commitments. So there are massive amounts of equipment and rail capacity gathering dust. Should companies fail one or two at a time over an extended period, the remaining industry can likely take up the slack.
But there’s a much greater than zero chance it won’t work that way; that the nulling-out of reserves in place and the ability to self-bond will simply mow down the industry at a pass. Which is why the government really does need to be prepared to step in. Not “bail out the coal industry” or “save the coal industry” but step in to keep mines operating until we can complete a build out of replacement sources.
Government should be prepared for a structured build-down and phase out of coal. Because as much fun as it is to talk about VHS tapes, and buggy whips, and even whale oil, none of those things was fueling a third of the nation’s electricity. Coal is, without a doubt, a disaster. The most polluting source of power in terms of greenhouses gases, toxic waste, acid rain, mercury, and even radiation. But if it disappeared overnight — there would be economic consequences that went way beyond the tens of thousands of people working directly in the industry. It could also leave the taxpayers looking at a set of gargantuan new “superfund” sites whose recovery costs are in the billions.
Democrats should be planning to help coal die with dignity by implementing plans that transition workers away, speed up implementation of reclamation plans, and assist power companies in getting replacement systems online. Otherwise what’s likely to happen is what’s been happening — each of those companies will become a golden parachute for a few owners and executives who sponge out the last dime and leave behind a husk.
Because an unplanned, unstructured collapse is seriously possible. Soon.