Benchmarks
The Clear Skies Initiative proposes to cut emissions of sulfur dioxide, nitrogen oxide and mercury by about 70 percent from current levels by 2018. What does the proposal mean for the coal industry? RDI Consulting believes it is a mixed bag. In other words, it depends on who you are. Are you a high-sulfur coal producer who has just been through a decade of mine closures and WARN notices? Or, are you a coal producer in the Powder River Basin supplying low-sulfur coal to an increasing number of coal-fired plants subject to Phase II of the Acid Rain Program? The answer may be counter-intuitive.
A potential impact of the Clear Skies Initiative would be the eventual closing of many smaller coal units, especially those with a capacity of less than 150 MW. Those plants likely will find that installing expensive emissions control equipment will not be economical. Those plants could continue to burn low sulfur coal as long as the plant's operator is over-complying at another unit or it is economical to buy emissions credits. However, at that point where sufficient allowances are not available, many of the smaller plants run the risk of becoming too expensive to operate if control equipment becomes necessary.
As plants invest capital to control emissions and comply with lower emissions caps, there is the potential for many users to switch from more expensive low-sulfur coal to high-sulfur coal, which may be lower in price, depending upon local circumstances. As a result, demand in the market could shift more to high sulfur coal produced in northern Appalachia and the Illinois Basin.
Producers in western supply regions potentially stand to lose market share in regions of the country more distant from their mines, say in Illinois and Kentucky. Additionally, as the market begins to favor high-sulfur coal, prices for low-sulfur coal would decline in response. The extent of those price reductions would depend upon local circumstances, but in some cases could be significant.
Under the Clean Air Acts Amendment (CAAA), coal plants are able to comply with emissions caps by burning coal that was less than about 1.0 lb.SO2/mmBtu. Many coal plant operators made the necessary adjustments to their facilities to burn low-sulfur western coal rather than install expensive control technologies at the units. Further, other industries, such as those in the transportation and mining equipment sectors, invested significant capital in response to the shift in demand for western coal. The western railroads invested in infrastructure connecting coalfields to major lines and invested in new railcars able to haul optimum volumes of coal. As a result, not only do western producers stand to be affected by the proposed legislation, companies that support western coal production and transportation may also be affected.
The Clear Skies Initiative, as proposed, is an environmental policy that could cause major shifts in coal distribution patterns. Low-sulfur coals that have exacted a premium price from the market under the 1990 CAAA may lose that stature under the new proposal. More eastern and midwestern coal producers stand to benefit by recapturing some market share lost during the 1990s for high-sulfur coals. However, much remains to be debated on this topic, so any definitive conclusions at this time are premature. Regardless, the Clear Skies Initiative, as well as any proposal that may follow it, is to be watched closely by the coal industry.
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