Power Player

King Coal and the irony of the endgame

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In North America at least, the endgame for coal has begun. And there is a rich irony — indeed, a double irony, to the story. What is killing coal is not the EPA, not the Paris Accords, not the divestment movement or any other anti-coal initiative of the granola-eating treehugger movement. Rather, it’s the six-shooter-toting, climate-change-disbelieving Texas oilmen and their big and successful play on domestic natural gas produced by “unconventional” (read "fracking") means.

Price competition from another fossil fuel is what has dethroned King Coal.

The second irony for coal is that, if it is to be saved, it won't be the coal complex — mining companies or current coal plant owners — that saves it but rather technology-driven clean-energy entrepreneurs who figure out how to get the carbon out of coal and turn the carbon in coal from an environmental liability into an economic asset. Or green-minded business people who figure out better things to do with those coal plants than keeping them producing power and emitting carbon at a financial loss.

The fracking revolution in the U.S. has brought the wholesale price of natural gas relentlessly down, from about $8 per million British Thermal Units (mmBTU) in 2008 to the $2 per mmBTU range today. With natural gas at $2 per mmBTU, whatever the coal utilities and coal-based independent power producers (IPPs) may be saying publicly to their public service commissions or institutional investors, it is almost certain that not a single coal plant in the United States is making money — and by making money, I am not talking about providing a return on the capital invested in building the coal plant. I mean "making money" in the sense of covering their fixed and variable costs of operation.

So, if all coal plants are losing money, why do power companies keep plowing billions of dollars into these economically distressed and environmentally challenged industrial facilities?

It is certainly not because Wall Street is in love with coal. Indeed, Wall Street, emphatically, has turned its back on coal. As recently as five years ago, the top five coal producers in the United States had a combined market cap in excess of $45 billion; two years ago, that number had dropped to $18 billion; and this week, the aggregate market cap of those five coal companies is significantly less than $2 billion. The value of the nation's coal-fired power plants, while more difficult to isolate and then quantify, also is almost certainly at a historical low.

No, industry's decision to perpetuate coal is not driven by a desire to win favor with Wall Street.

For regulated utilities, the answer actually is pretty simple: Coal plants survive and operate because public service commissions allow them to and reward them for so doing through rate-based recovery. For coal independent power producers (IPPs), there is no easy answer. It may be rooted in the lack of a full accounting of what it is really costing them to own and maintain their coal plants.

All power companies are pretty good at calculating the variable costs of operating and maintaining coal plants, but the fixed costs? When you evaluate how much time and effort is devoted in a power company's headquarters to the care and feeding of its coal plants — the engineering department, procurement, the environmental compliance group, the risk group, the traders — if that cost were allocated to individual plants rather than to undifferentiated G&A — the financial losses associated with the coal plants would look even worse than they already do.

On a human level, the power industry's reluctance to close down old coal plants is understandable and even admirable. I can tell you from personal experience, plant closures are gut-wrenching for all concerned, as they fall heavily not only on the affected employees, but also local businesses and the community schools.

But if industry decision making is really rooted in genuine human concern, then the modest-to-no efforts of various coal plant owning companies to figure out a second act for the extraordinary men and women who operate these plants is both incomprehensible and inexcusable.

More likely, the reluctance of coal plant owners to seriously evaluate alternative use of their coal assets is born of a myopic default to business as usual — wishful thinking that skyrocketing natural gas prices are just around the corner, or just plain unwillingness to make tough decisions that, once made, cannot readily be unmade.

There is little public indication that coal plant-owning companies, or the public service commissions that supervise them, are reassessing each of their economically distressed coal plants to see what is their best available alternative use.

That effort would involve, initially, cataloguing the various attributes of those plants that may unlock economic value, including the dedicated and skilled workforce; the positioning of the plant on the transmission grid; the value of the interconnect; the non-power real estate value; and the value of avoided carbon that might be realized upon the plant's closure.

All the while, environmentalists continue to fight the fight against coal and coal-fired generation using their traditional tactics — EPA regulation, litigation, sporadic protests — while their most potent economic argument (“You keep losing money from plants that employ technology that Wall Street deems obsolete”) remains undeployed.

Maybe it is time for a different approach.

Maybe instead of sponsoring a divestment campaign, Bill McKibben and 350.org should sponsor an investment campaign — to buy up the nation's coal mines or coal plants at cents on the dollar. While it is sort of amusing — but hard to imagine — McKibben or the Sierra Club or Greenpeace as the proud owner-operator of a coal mine or coal fleet, there are plenty of environmentally oriented business leaders and investors with the financial means, the acumen and the outside-the-box thinking needed to figure out what comes next for these coal plants in a world that cannot afford to accommodate their carbon emissions much longer.

At the very least, we could count on green business leaders to take a hard look at the true costs of continuing to operate these coal plants in a nation awash in natural gas. And maybe, just maybe, with a new set of eyes on the situation, innovative solutions would be developed for these power plants that gives them — as well as the skilled and dedicated professionals who operate them and the communities who host them — a second life as a non-carbon-emitting contributor to our society.