Coal: Has the Reign of King Coal Ended? Part B Peter Schwarz Professor of Economics, Belk College of Business and Associate, Energy Production and Infrastructure Center (EPIC) UNC Charlotte of 19

Outline Introduction A Brief Economic History Supply Chain Cost Market Structure Environmental Considerations of 19

Cost (1) Depends on: Production cost Characteristics Demand Appalachian: low sulfur, high heat rate (bituminous), surface and underground mining $45/ (short) ton in 2015 Illinois Basin: High sulfur, intermediate heat rate (mostly bituminous), underground mining Lower or higher P? Wyoming: Low sulfur, Low heat rate (sub-bituminous). Also low ash and low water content Price? https://www.quandl.com/data/EIA/COAL-US-Coal-Prices-by-Region of 19

Cost (2) Why not just buy from Wyoming? Why ever buy from Illinois? Biggest reason Transportation costs Why ever buy from Illinois? Lower transportation costs to Midwest Most utilities have installed scrubbers to remove 90% or more of sulfur. Illinois lobbied for this requirement to preserve the market for their high- sulfur coal. Scrubber often inefficient way to reduce sulfur ($360 million for 1 gigawatt plant). Low sulfur coal cheaper alternative to reduce sulfur emissions. of 19

Cost (3) Coal ash an increasing concern after two accidents Tennessee Valley Authority (TVA) Kingston, TN December 2008 Largest spill >$1 billion cleanup costs (TN fined $11.5 million, EPA fined $0) Duke Energy Dan River Basin February 2014 3rd largest spill $100 million in fines and restitution (NC fined $6 million, EPA $0) Why EPA $0? No federal regulation of coal ash. NC has passed its own law since the accident. Contains heavy metals of 19

Cost (4): Capital Costs Underground mining costs more than surface mining Underground mining cost depends on Seam thickness Seam depth Mining method Room and pillar Retreat mining Longwall mining can be final stage or an alternative to room and pillar. More automated, higher extraction rate, but concerns about land subsidence Safety measures U.S. fatalities dropping Safer And fewer mines of 19

Costs (5) Processing Costs Remove impurities Sulfur Water Ash Increase heat rate Reduce carbon emissions Reduce transportation costs Capital and O&M costs for coal-cleaning equipment Equipment (fixed cost) Chemicals (variable cost) of 19

Costs (6) Regulatory Costs Lax regulation decreases private costs But may increase social costs West Virginia Freedom Industries Produced chemical to remove coal ash from coal. Chemical leaked North Carolina Duke Energy Coal ash spill due to hole in drainage pipe. George Stigler (1971): Capture Theory How connected with WV, NC accidents? of 19

Cost (7): Transportation Cost Rail: 70% of coal transport Accounts for 40% of delivered cost More demand from oil and natural gas where pipelines unavailable of 19

Cost (8): Cost to Generate Electricity Baseload plants 85% capacity factor Environmental regulations Scrubbers on most baseload plants Intermediate (shoulder) units Higher cost per unit of coal Not on older, smaller, coal plants Levelized cost U.S. EIA no longer lists coal Was comparable to nuclear cost in 2014 Included 3% premium in discount rate to reflect risk of carbon regulations. Carbon-capture-and -storage still very costly. of 19

Market Structure (1): Competition Is coal competitive? Many coal mines Competitive at the mine mouth. Coal a commodity Some product differentiation. But buyers can purchase any grade of coal and get it to specification. Large capital cost Not a barrier in my book. Inability to buy mineral rights would be a barrier. High industry concentration But competition from other fuels Numerous bankruptcies, including largest firms. How do I define a barrier to entry? of 19

Market Structure (2) Long Run Competitive Equilibrium for Coal Industry of 19

Market Structure (3): Coal Cartel? or Dominant Group Price Leadership Global price: Huge rally China reduced production of 19

Market Structure (4): Company Town? Monopoly Company owned housing Grocery stores Issued scrip Kept miners in debt. Monopsony Company was only hirer of labor. Lmonopsony < Lcompetition wmonopsony < wcompetition “I owe my soul to the company store” Fishback (1986): Economic historian. Disagrees. Workers could move to another town. Workers in other towns shared information. Workers received 30%-80% of their wages on payday. of 19

Emissions and Other Environmental Impacts (1) Air Emissions 1952 Toxic fog in London due to burning of coal. 12,000 premature deaths Over 100,000 illnesses. 1990 Sulfur emissions trading in U.S. Lowered cost of reducing sulfur Until new scrubber regulations Caused collapse of sulfur trading market Also NOx trading (in summer) Selective Catalytic Reduction (SCR) reduces NOx. So does syngas. Particulate legislation Mercury rules in limbo, but utilities reducing it anyway. Greenhouse gases- mainly CO2. Clean Power Plan in limbo. Regional initiatives EU C trading of 19

Environmental Impacts (2) Water Contamination Stems from a number of points in the supply chain Coal mining Drainage from mines Mountaintop removal Processing Coal sludge/slurry Mixture of coal and water from coal cleaning Heavy metals Coal-fired electricity plants Mercury Thermal pollution Acid rain Coal waste Coal ash Waste from scrubbers of 19

Environmental Impacts (3) Water Contamination Underground mines require continuous pumping to prevent flooding. Water + sulfur-bearing minerals = acidic water. Dead fish near WV coal mines Tailings: unwanted material from extraction of coal Overburden: unwanted mountaintop rocks and soil Sludge and heavy metal wastes Alpha Resources exceeded legal limit (by about 35x) Not the only firm to violate WV standards. Thermal pollution Water that has been heated during combustion is discharged. Mix with water: acidic of 19

Environmental Impacts (4) Land Degradation 1977: U.S. Surface Mining Control and Reclamation Act Can’t fully restore ecosystems Land may be abandoned Department of Interior has division that collects fees to reclaim degraded, abandoned land. Fires from underground mines Centralia, PA Has burned for > 50 years. Hard to extinguish. of 19

Environmental Impacts (5): Human Health Effects Higher rates of death, birth defects. China estimates premature deaths of 250,000 people, also illness. Decrease in expected lifespan of 5.5 years due to air pollution, largely from coal use. Should coal miner deaths and illnesses be counted as externalities? Economists say: Not if wages compensate for risk. Robert Gordon (2009): Government programs to protect health of miners drive up costs unnecessarily. Reduce worker productivity Cost jobs. If working in retreat stage of mining has a 1/1000 risk of a fatal accident and pays an extra $5,000 per year, what is the implied value of a statistical life? 1000 miners collect an extra $5,000 each, or $5,000,000 in all to compensate for one expected death. EPA euphemism: Value of reduction in mortality risk. of 19