The once and future king
WRIGHT, WYO. • Every minute, a machine at Peabody Energy Corp.’s North Antelope Rochelle mine scrapes an 80-foot wall of coal with a giant steel claw. With each swipe, the beast pivots and deposits a heap of black rock into a waiting truck.
From a distance, the yellow CAT looks like a Tonka toy. But it stands two stories tall, with 12-foot tires. On its side, a display resembling a basketball shot clock records the weight of each load.
This one reads 398 tons — enough to power a typical American household for 60 years.
That a single machine can extract decades’ worth of energy underscores the scale of mining here in Powder River Basin, the source for 40 percent of the nation’s coal and the fuel for 80 percent of Missouri’s electricity. “We move in a day what some of the mines in the Midwest move in a month, or small Appalachian mines move in a year,” boasts Jeane Hull, a Peabody group vice president who oversees the company’s Western U.S. operations.
The breathtaking scope translates directly into the low costs that drive America’s continuing addiction to coal-fired power — despite dire climate-change warnings and the growing chorus calling for clean fuels. At today’s prices, it would take $60 in natural gas to produce the same energy as a $14 ton of Powder River Basin coal. Coal costs more to ship to market, but even if you tripled its price to account for rail transport to far-flung plants, it’s still cheaper than raw natural gas — without adding in pipeline costs, said Steven F. Leer, chief executive of Creve Coeur-based Arch Coal Inc., the second-largest producer in the basin after St. Louis-based Peabody.
Arch and Peabody executives say that’s not likely to change over the next decade, despite rising coal production costs, falling natural gas prices, the push for wind and solar power, and an alphabet soup of new environmental and safety restrictions.
Big Coal’s expansion plans have prompted the Sierra Club and other environmentalists to use the courts and everything else in their power to stop them. They believe pollution rules and declining costs for alternatives will combine to erode coal’s historic price edge. Bruce Nilles, chief of the Sierra Club’s Beyond Coal campaign, confidently pronounces the “old days” of cheap coal “long gone.”
The coal industry begs to differ. Indeed, companies such as Arch and Peabody are pushing more chips into the pot, betting big that demand for coal — particularly the premium variety mined here in the Powder River Basin — will continue to grow. That growth may come at the expense of other coal producing regions, especially Central Appalachia. And utility executives concede that sweeping climate change legislation, if it ever passes, could make coal-fired energy prices spike.
But the industry has a backup plan that could create a whole new battlefield with environmentalists: exporting Wyoming’s rich reserves to power-hungry countries such as China, where economists see the demand curve trending higher for years, if not decades, as billions of people seek to claw their way into the modern world.
The other fundamental question the opponents of coal struggle to answer: If not coal, what? No alternative energy source — or combination of sources — can yet provide enough power to fire the factories and cool the homes of a nation spoiled for decades by cheap electricity.
Robert Clayton, chairman of the five-member Missouri Public Service Commission, said coal will remain the workhorse fuel in the state for years to come.
“At the end of the day, the consumers want the lights on when they turn them on,” he said. “And it’s up to us to make sure the utilities have the power to do that.”
DIGGING IN
Altogether, coal companies work a dozen mines in the Powder River Basin, clustered together in a narrow north-south strip near Gillette, Wyo., the self-proclaimed “Energy Capital of America.” Peabody and Arch own five of them, including the two largest. Together, the two companies control more than 4 billion tons of basin reserves and last year accounted for more than half of the coal mined here.
Peabody, the world’s largest private-sector coal miner, has a permit to dig into a new 800 million-ton block of coal just north of its flagship North Antelope Rochelle mine, which will produce more than 100 million tons of coal this year.
The new School Creek mine could be tapped as soon as next year. The company has said it will produce up to 35 million tons a year.
To outsiders, coal is coal. But School Creek represents the coal qualities sought by utilities — high energy content and low sulfur. Vic Svec, a Peabody senior vice president, discusses it with the reverence that a wine collector speaks about a prized vintage.
“This is a fantastic reserve block that will be developed,” Svec said. “It’s just a matter of timing.”
Creve Coeur-based Arch is growing in other ways. A year ago, it paid rival Rio Tinto Plc $761 million for Jacobs Ranch, a sprawling mine that shares a border with its giant Black Thunder operation. The combination yielded the world’s largest mining complex, producing a staggering 4 tons of coal per second.
CLIMATE FOR COAL
Big Coal executives have little doubt that the Powder River Basin output will continue to grow. But they can extract only what their customers — power producers, such Ameren Corp. in St. Louis — will buy. And the optimism in the coal fields stands in stark contrast to how some others, particularly regulators and environmentalists, view its future. The industry faces political threats on two fronts: a slew of new rules to curb pollution by existing plants and the longer-term prospect of climate change legislation.
The white-hot politics of climate change remain a wild card. Many climate scientists warn that nothing short of a drastic reduction in emissions of carbon dioxide and other heat-trapping gases will prevent the worst effects of global warming. And no single source puts off as much CO2 as coal-burning power plants.
Congressional Democrats failed to pass climate legislation last year, and the chance for such a measure dimmed considerably when Republicans grabbed control of the House last month. But the Obama administration is pursuing another avenue. Spurred by a landmark Supreme Court decision in 2007, the EPA has declared greenhouse gases a health threat. New EPA restrictions on new sources of CO2 will take effect Jan. 2 — making it nearly impossible to build or expand a coal-fired power plant. The agency on Wednesday said new rules affecting existing power plants could be issued in 2015 or 2016.
“I think it’s safe to say that getting a coal plant built is going to be a high hurdle going forward,” said Shawn Schukar, who oversees environmental compliance strategy at Ameren, one of the nation’s most coal-heavy utilities.
POLLUTION CONTROL
While the carbon regulations only will affect the industry’s ability to expand, the nation’s 500 existing power plants must soon grapple with separate regulatory pressures on their bottom line: Air- and water-quality regulations expected to be phased in over the next several years. The EPA is developing new rules that would force power plant operators to curb all sorts of pollution — nitrogen oxides, ozone, sulfur dioxide, particulates, mercury. The agency is also considering regulating disposal of toxic coal ash, in the wake of the 2008 disaster in Tennessee, where a disposal pond wall collapsed, coating 300 acres with wet coal ash and polluting two rivers.
The Brattle Group of Cambridge, Mass., estimates new federal environmental regulations could shut down almost one in every five coal-fired power plants nationwide, reducing coal use by 15 percent in the next decade.
The coal industry believes such threats are overblown. Arch recently performed an internal analysis, examining the fate of every coal-fired boiler in the country. (The 500 or so plants collectively include about 1,000 boilers.) The company concluded that more than 400 of the least efficient — some of which date back to the 1940s — would likely be retired under new EPA regulations.
Even if all of those boilers shut down over the next decade — unlikely, says Arch’s Leer — it would only reduce annual coal burn by 118 million tons, or about 11 percent. That’s because most of these inefficient plants often sat idle even in a good economy.
U.S. coal plants that escape the regulatory ax would, however, face costly retrofits, said Metin Celebi, a co-author of the Brattle report. The firm predicts that power producers might ultimately have to spend up to $180 billion on new pollution controls.
With the timing and severity of climate change legislation unclear, utility executives face a dilemma: Do they spend hundreds of millions of dollars to retrofit a coal-fired power plant when future political action could render it a white elephant? “If you make an investment and then slap on a high carbon tax,” Schukar said, “it may make that investment look bad.”
Of course, the EPA has already delayed some of the new rules. Many will be litigated for years. And the coal industry is spending millions of dollars lobbying Congress to fight every change. Peabody, for instance, sued the EPA, challenging its finding that greenhouse gases are a health threat. The company fought efforts in Colorado to switch four coal-burning power plants to natural gas. Peabody ultimately lost both challenges, but showed the will to tie up regulatory efforts in extended and expensive battles.
THE CAPACITY GAP
For all of the heat on King Coal, every other energy source faces its own vexing challenges. Wind, solar, natural gas and nuclear each face a different set of issues involving supply, capital investment, price or politics. Last year, coal-fired power accounted for nearly half of all electricity used in America; none of its opponents has yet offered any comprehensive plan to make up that gap, even with aggressive energy efficiency goals.
Renewable energy use is growing fast, propelled by state mandates and taxpayer-financed federal incentives. And while wind and the sun are free, turbines and solar farms remain expensive to build, especially compared to a coal-fired power plant that’s already paid for, analysts say.
What’s more, solar and wind farms can’t generate power 24 hours a day, seven days a week, producing so-called baseload electricity. Wind farms in northwest Missouri, for instance, are available only about 25 percent of the time.
Nuclear power remains cheap to produce, but new plants could cost $10 billion or more, and Wall Street has so far been unwilling to make that bet — to say nothing of safety issues involving radioactive waste disposal that remain a political third rail.
The biggest threat to coal is cleaner-burning natural gas, specifically gas produced from shale rock. The Energy Information Administration, an arm of the U.S. Energy Department, this month more than doubled its estimate of technically recoverable natural gas reserves from shale. The flood of new supply and a weak U.S. economy has helped push down natural gas prices to $4.08 per thousand cubic feet from a high of $14 in mid-2008.
Energy consultants Black & Veatch estimate natural gas, which will be used to power 21 percent of electricity in 2011, will see its market share grow to 40 percent by 2035 while coal’s shrinks from 48 percent to 21 percent.
But the new gas boom faces environmental problems, too. The technique for pulling gas out of shale rock with high-pressuring water — called hydraulic fracturing, or fracking — has sparked a public backlash over contamination of groundwater and drinking water in nearby neighborhoods.
And some question the wisdom of making a long-term bet on natural gas — a fuel that Duke Energy Corp. CEO Jim Rogers referred to as the “crack cocaine” of the power industry. Utilities in the past have gotten hooked on cheap gas and made huge investments, only to see prices spike and plants idled.
Gas won’t be stealing much market share from coal anytime soon, said Bill O’Grady, a longtime energy analyst and chief market strategist at Confluence Investment Management LLC.
“I’m skeptical that these gas companies can pull this stuff out of the ground as cheaply as the current market price says they can,” he said.
Like it or not, analysts say, the nation’s energy future will rely heavily on sprawling strip mines like North Antelope Rochelle — dusty moonscapes where supersized machines and explosives scoop, shovel and blast away 24 hours a day to keep the lights on hundreds of miles away.
Even if coal executives are overestimating U.S. demand, they know that customers in a larger, faster-growing energy market — Asia — will take up the slack.
Peabody and Arch are both studying opportunities to ship millions of tons to places such as China, Taiwan, South Korea and perhaps India. Such plans could simultaneously pave the way for growth in the Powder River Basin and further galvanize environmental opposition.
“Exporting coal is a line in the sand to us,” said Sierra Club’s Nilles. “Why on God’s green Earth would we ever enable that?”
-Jeffrey Tomich
