As the sun sets on coal in the electric power sector, analysts say suppliers will look to consolidate to ride out the industry’s decline.
That’s what the nation’s two largest coal miners have proposed: a joint venture between Peabody Energy Corp.’s and Arch Resources Inc.’s operations in Colorado and Wyoming.
But the Federal Trade Commission has moved to block the merger, arguing that the venture would eliminate competition in Wyoming’s part of the Powder River Basin, a coal mining region that the independent antitrust agency says is a distinct market.
Peabody and Arch say the relevant market includes natural gas and renewables, energy sources that have helped cause coal’s share of U.S. electricity generation to fall from 50% in 2004 to less than 25% today.
The two coal companies could raise prices under one operation, shifting higher costs onto consumers if the joint venture goes through, the FTC warns.
The state of Wyoming, which backs the merger, says consolidation minimizes the risk of sudden mine closures and layoffs that have plagued local communities during coal’s long tailspin.
The debate is playing out in the U.S. District Court for the Eastern District of Missouri. Judge Sarah Pitlyk, a Trump appointee, is set to soon decide whether to grant a preliminary injunction to effectively end the joint venture before it starts.
What’s at stake
The Powder River Basin, which produces about 40% of U.S. coal each year, spans northeast Wyoming and into Montana. Wyoming’s portion — the southern Powder River Basin — is home to the nation’s most expansive open pit coal mines.
The two biggest of those coal mines are Peabody’s North Antelope Rochelle and Arch’s Black Thunder. They produced about 98 million tons and 71 million tons, respectively, in 2018. More coal was mined from North Antelope Rochelle alone that year than in all of West Virginia.
“To really see the scope of the operations in the southern Powder River Basin, you have to fly over the area,” said Robert Godby, an energy economist at the University of Wyoming. “Then you really realize just how huge these things are.”
But coal mining in Wyoming slowed over the past decade as utilities increasingly opted for natural gas and wind. The southern Powder River Basin produced 417 million tons of coal in 2009, compared with 267 million tons last year, according to consulting firm IHS Markit.
The stakes are high for Peabody and Arch, both of which went through bankruptcy in the past decade. The proposed merger involves five mines in Wyoming and two in Colorado. The two companies would control more than 60% of coal reserves in the southern Powder River Basin.
Peabody and Arch would split ownership, 66.5% to 33.5%, with Peabody running operations. Improving efficiencies in rail transportation, mine planning and other areas will save them $120 million per year for the first decade, the coal giants expect.
Both firms could use the money.
Peabody last month told shareholders that the North Antelope Rochelle mine is worth $1.4 billion less than they previously thought, in an acknowledgement that coal’s window as a viable energy source is closing (Greenwire, Aug. 6).
For Arch, the merger would allow it to shift focus away from electricity generation to metallurgical coal used for steelmaking. (The company recently rebranded itself from Arch Coal to Arch Resources to reflect its change in priority.)
But first, Judge Pitlyk must weigh the FTC’s argument that the venture would violate antitrust laws.
Southern Powder River Basin coal is distinct from other varieties. It produces less heat than higher-grade coal from Appalachia. But many power plants switched to Wyoming coal in the 1990s because its low sulfur content helps utilities meet air emissions standards.
Now, some plants are designed specifically to burn that type of coal. That gives the southern Powder River Basin its own market, separate from other coal basins and other sources of energy, the FTC says.
If the nation’s largest coal miners merge their Wyoming operations under one umbrella, the agency argues, it would wipe out the cutthroat competition currently underway in the basin.
Ameren Corp., a power company based in St. Louis, summed up the argument in its testimony for the FTC at July’s court hearing, a spokesperson for the company said.
“Only one seller would increase fuel costs. By law, those fuel costs are passed directly on to customers,” the spokesperson said.
There is a “stickiness” between where coal comes from and the power plants that can burn it, said Chiza Vitta, a coal analyst at S&P Global Ratings. Still, a long list of factors affects the price of coal, including transportation costs, domestic demand and export markets.
Natural gas prices, which hit historic lows this summer, also limit how high coal prices may rise while remaining economical.
“If you are a electricity producer that does not have the ability to use natural gas or pivot to something else, then you probably are not in as good of a position to take advantage of lower prices in natural gas,” Vitta said. “A lot of their customers do have that option.”
‘The decline is very unhealthy’
Peabody and Arch argue that the FTC should consider coal as part of the energy industry as a whole. Coal generated 50% of U.S. electricity in 2004, but last year, it accounted for less than 25%.
Andy Blumenfeld, an IHS Markit coal analyst, expects cheaper fuels and efforts to combat climate change will continue to drive down demand for coal. The court may consider the massive losses coal has endured in the past decade when making a decision, he said.
“It’s sort of hard to ignore the influx of natural gas into the entire power market. I would have to think that does, in fact, carry some weight,” Blumenfeld said in an interview.
Godby, the University of Wyoming economist, is sympathetic to the joint venture. While Peabody and Arch would have more control of coal prices, he said raising them too high would hurt the companies.
“If they raise the price too much, to the point where it affects consumers, they would probably just increase the pace of retirement of the plants using their coal and increase the pace of their replacement by renewables or natural gas,” Godby said.
Coal plant retirements have accelerated under President Trump, despite his administration’s efforts to weaken environmental regulations to favor coal (Climatewire, June 22).
The state of Wyoming supports the merger of coal behemoths. The coronavirus pandemic and this year’s fossil fuel slump have disastrous consequences for the state’s budget, which is heavily dependent on oil, gas and coal revenue. It is currently considering a range of austerity measures, including cuts to health services and education.
In an amicus brief, the state argued that unforeseen bankruptcies and abrupt mine closures have a crippling effect on Wyoming communities.
“Consolidation is going to happen one way or another,” the amicus brief says. “The Court should permit it to happen thoughtfully rather than through one catastrophic closure after another.”
Godby recalled last year’s Blackjewel LLC bankruptcy. The miner shut down two Powder River Basin coal mines, and nearly 600 workers in Wyoming lost their jobs overnight. That company is in negotiations to make back payments to former employees as part of its ongoing bankruptcy case. Blackjewel still owes more than $50 million in royalties.
Without orderly consolidation, Godby said, the industry’s downturn could continue to be chaotic, to the detriment of coal communities.
“Right now, you have a declining industry,” he said. “That doesn’t mean that as we get older or as we decline that we have to be unhealthy.”
Reprinted from Greenwire with the permission of E&E News. Copyright 2020. E&E News provides essential news for energy and environment professionals at www.eenews.net.