Regulation looms for US coal in 2016

OREANDA-NEWS. December 30, 2015. The brunt of regulatory pressure on the US coal industry is unlikely to ease in 2016.

And the coal sector is gearing up for the possibility that pending rules could make it even more difficult for coal-fired power plants to operate.

The US Environmental Protection Agency (EPA)'s mercury and air toxics rule and the Clean Power Plan for reducing CO2 emissions in the power sector are affecting US coal markets on the demand side. The federal stream protection rule expected to be finalized next year could have a substantial effect on the supply side.

As a result, many in the coal industry see the future in stark terms. President Barack Obama's administration is the first one in history "dedicated to the destruction of the coal industry," coal industry group the National Mining Association (NMA) says.

The US Supreme Court this year sent the mercury and air toxics rule back to the EPA, demanding a more precise analysis of its costs and benefits. But utilities and merchant generators years ago made decisions on compliance with the rule, so the outcome of the new EPA analysis is unlikely to overturn decisions already made on power plant retirements.

In the wake of the mercury rule's implementation, power plant owners have spent hundreds of millions of dollars to upgrade emissions controls on coal-fired units. Many of those upgrades served a dual purpose, helping plants comply with EPA's Cross-State Air Pollution Rule for SO2 and NOx. Other plants retired as their owners decided upgrades were too costly given increased competition from natural gas.

Coal-fired capacity retirements in 2016 are expected to amount to 12,644MW at 67 power plants, based on the Argus coal retirement database. That would be in addition to the 21,532MW of capacity at 127 plants taken out of service this year. The cumulative retirements in 2015 and 2016 are expected to amount to about 3pc of total installed generation capacity in the US. Some of the shut downs reflect generation economics and competition with natural gas. But many of the retirements are the result of the industry's compliance with the mercury regulations.

The EPA plan to reduce CO2 emissions in the US power sector is going to force even more retirements. The federal agency expects the rule to make as much as 38GW of coal-fired generation uneconomic to run by 2030, which is 12pc more than the retirements in 2015-16. Coal production in 2030 would be 22pc below the base-case scenario, according to the EPA.

The Clean Power Plan is facing multiple challenges in courts and opposition in Congress. The plan requires 47 states to meet CO2 emission reduction targets phased in from 2022-2030. The states have until September 2016 to offer initial compliance plans to EPA, with final plans due two years later.

At least four separate motions to stay the Clean Power Plan deadlines were filed on 23 October, along with about 15 lawsuits to overturn the regulations. The motions ask the DC Circuit Court of Appeals to put the Clean Power Plan on hold while it hears the lawsuits. On 23 December, state and industry plaintiffs pressed the DC Circuit Court of Appeals to halt the Clean Power Plan. A decision is expected early next year. Obama early this month vetoed a pair of congressional resolutions to overturn the plan.

On the supply side, the Interior Department in late 2016 expects to complete work on an update to the federal stream protection rule. Many industry insiders consider the proposal potentially more damaging for producers than the Clean Power Plan. But Interior says the effect on production is minimal and points out to environmental benefits of the rule.

NMA has estimated the provision could block access to 63pc of known coal reserves, while Interior said the plan would only reduce US coal production by 0.2pc over the next two decades.

The outcome of the US presidential election in November 2016 will determine the direction of regulations affecting coal through the end of the decade. The final shape of the Clean Power Plan depends on the conclusion of its review in courts. But other regulations affecting the coal industry will prove hard to undo even if a different administration takes the White House in January 2017.