Coal Tattoo

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Gazette photo by Chip Ellis

Given the numerous challenges working against any substantial recovery of the region’s coal industry, and that production is projected to decline significantly in the coming decades, diversification of Central Appalachian economies is now more critical than ever. State and local leaders should support new economic development across the region, especially in the rural areas set to be the most impacted by a sharp decline in the region’s coal economy.

That’s the take-home message from a major new report issued today by the Morgantown consulting group Downstream Strategies. The report is called, “The Decline of Central Appalachian Coal and the Need for Economic Diversification.”

It’s must-read material for anyone who cares about the future of the Appalachian coalfields, and especially for elected officials who keep hoping that the next coal boom is just around the corner.

evanhansen.jpgrory.jpgAuthors Rory McIlmoil and Evan Hansen  make the case that a host of factors — competition from other coal-producing regions, rising interest in natural gas and renewable energy, and the depletion of Central Appalachia’s best reserves — has prompted a decline in regional coal production that is unlikely to be reversed. In fact, they report:

After strong and increased production through the mid-1990s, regional production last peaked in 1997 at 290 million tons. Even as national production continued to grow, by 2008, Central Appalachian production has fallen 20 percent to 235 million tons.

Recent projections indicate that — despite substantial coal reserves — annual production may decline another 46 percent by 2020, and 58 percent by 2035, to 99 million tons.

And, importantly, that’s without considering the potential impacts of climate change legislation or new restrictions on mountaintop removal coal mining. Both of those policies are likely to further squeeze the region’s coal industry, the report says, making it all the more important to begin planning for such events:

Should substantial declines occur as projected, coal-producing counties will face significant losses in employment and tax revenue, and state government will collect fewer taxes from the coal industry. State policy-makers across the Central Appalachian region should therefore begin taking the necessary steps to ensure that new jobs and sources of revenue will be available in the counties likely to experience the greatest impact from the decline.

The report adds:

While there are numerous options available, the development of the region’s renewable energy resources and a strong focus on energy efficiency offer immediate and significant opportunities to begin diversifying the economy.

In a news release, Rory said:

Coal has contributed significantly to local and state economies in Central Appalachia, but production has fallen substantially over the last 12 years as other coal basins and sources of fuel have become more competitive. This trend is expected to continue as mining costs increase due to the depletion of the lowest cost coal reserves, and as new environmental regulations are implemented. As this happens, local and state economies will need new sources of jobs and revenue to replace coal mining jobs and taxes.

And Evan added:

Given that coal production is projected to decline significantly in the coming decades, diversification of Central Appalachian economies is now more critical than ever. State leaders should use this legislative session to increase support for new economic development across the region, especially in the rural areas set to be the most impacted by a sharp decline in the region’s coal economy.

We’ve talked a lot on Coal Tattoo about the concept of “peak coal,” and  about what greenhouse gas limits and new restrictions on valley fills would mean for the coal industry and the region as a whole. We’ve discussed options for “green jobs” in the coalfields, including an op-ed Evan co-wrote about an abandoned mine cleanup project that Downstream Strategies was working on as one example, and Rory’s project in his former job promoting the Coal River Wind Project (and Evan’s report on the economic benefits of it).

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If you’re not familiar with them, there’s more background on Rory, Evan and Downstream Strategies on their Web site. They describe themselves this way:

Downstream Strategies is an environmental consulting company in Morgantown, West Virginia, with program areas in environmental policy, environmental science, and geographic information systems. The company provides science, research, and tools to organizations, businesses, and agencies. It offers clients an alternative to mainstream environmental consulting by combining sound interdisciplinary skills with a core belief in the importance of protecting the environment and linking economic development with natural resource stewardship.

This report is the first in a series of white papers Downstream Strategies plans to publish to try to help inform public policy decisions about energy and climate change, water quality and quantity, and other issues of importance to the state, region and nation. This particular paper was not funded by any particular client, grant or organization.

The Decline of Central Appalachian Coal and the Need for Economic Diversification makes even more clear that the coal industry in Central Appalachia (defined as  the coal-producing counties in Southern West Virginia, Eastern Kentucky, southwest Virginia, and eastern Tennessee) is already in big trouble — with or without more environmental restrictions.

And this is terribly important for the region, as McIlmoil and Hansen explain:

Coal mining has played an important role in local economic development in Central Appalachia, primarily due to the jobs and taxes that the industry has provided. In 2008, for instance, the coal industry employed 37,000 workers directly and indirectly across the region, accounting for 1% to 40% of the labor force in individual counties. Additionally, the coal severance tax generates hundreds of millions of dollars in state revenues across the region every year, with tens of millions of dollars being distributed to counties and municipalities. Despite these economic benefits, coal-producing counties in Central Appalachia continue to have some of the highest poverty and unemployment rates in the region, and due to the dependence on coal for economic development, any changes in coal production will have significant impacts on local economies.

So, let’s talk about the meat of the report. Take a look at this chart (click on it to make it larger):

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In particular, look first at that bump up in Central Appalachian coal production from 1993 to 1997. That’s the period where the initial requirements of the 1990 Clean Air Act are frequently cited as driving up demand for low-sulfur coal in this part of the country — and, perhaps ironically, environmental protection regulations helped bring about the increase in mountaintop removal during that period.

But then look what happens after 1997.  It’s consistently dropped, to about 235 million ton in 2008. And follow that red line until it turns into a dotted line … the drop — as projected by the U.S. Department of Energy, even absent any restrictions on greenhouse emissions — keeps going. DOE projects Central Appalachian coal production could be cut in half before the end of this decade.

Let’s repeat that: Central Appalachian coal production could be cut in half before the end of this decade. And, again — that’s absent any climate change legislation or regulation.

Why is production from this historically coal-rich region dropping, and why is it projected to continue to drop?

Downstream Strategies outlines three primary reasons:

1. Increased competition from other coal-producing regions and other sources of energy;

2. The depletion of the most accessible, lowest-cost coal reserves; and

3. Environmental regulations.

coal_power_plant350x323.jpgLet’s start by going back to the Clean Air Act. While the early requirements of it benefited Central Appalachian coal, the second round of implementation dates has not. The first round required air pollution reductions from a smaller set of U.S. power plants, and many utilities chose to meet  these by switching to lower-sulfur coal. A couple things happened as a result. Operators put more resources into big mountaintop removal mines in Central Appalachia, to get at the low-sulfur coal there. The high-sulfur coalfields of Northern Appalachia and Illinois saw thousands of mining jobs disappear. And, of course, coal mining skyrocketed at the huge surface operations of Wyoming’s Powder River Basin.

But now, with another round of pollution reductions affecting a much larger number of power plants, more and more utilities have installed scrubbers — meaning they can use high-sulfur coal from places like North-Central West Virginia and Southern Illinois. The report uses utilities in Pennsylvania and Ohio to illustrate what’s happening:

Since 1995, when the first phase of the CAA amendments took effect, another 4,523 MW of generating capacity have been equipped with FGD (approximately 2,600 MW after 2000)—nearly doubling the total scrubbing capacity. As of 2007, 35% of all coal-fired generators comprising nearly 50% of all coal-fired generating capacity in Pennsylvania were equipped with FGD (NETL, 2007). Aided by the new FGD installations at its coal-fired power plants, Pennsylvania’s annual consumption of Central Appalachian coal since 2000 has declined by approximately 9 million tons.

And:

Following an increase in both Central Appalachian and PRB coal through the 1990s, utilities in Ohio have since reduced their annual consumption of both Northern and Central Appalachian coal, by a total of nearly 14 million tons, while increasing their demand for PRB coal by an additional 9 million tons. This marks a significant decline in the competitiveness of not only Central Appalachian coal, but Northern Appalachian coal as well, in relation to coal from the PRB.

While this is happening, coal is also facing increased competition from natural gas and from alternative energy sources.

Here’s part of what the report says about natural gas:

Coal is facing an increasing challenge from natural gas as a preferred energy source. The discovery of new reserves has resulted in an over-supply of natural gas, which has reduced the cost of electricity generation from natural gas in relation to coal. In recent years, this has had a significant impact on the choice of fuel for new and existing generation.

… Coal’s share of total electricity generation in the US declined by 2% between 2003 and 2008, even with a slight increase in absolute generation, while the share of natural gas increased by 5%, resulting from a 35% increase in generation. Planned capacity additions through 2012 are dominated by natural gas, totaling over 48,000 MW, or 52% of planned additions, while coal-fired power plants amount to around 23,000 MW, for 26% of the tota. Overall, recent trends and planned additions suggest that natural gas may take an increasingly greater share of electricity generation.

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And here’s part of what it said about renewable energy:

Renewable energy, while still more expensive than conventional fuels such as coal and natural gas for electricity generation, has also been slowly growing in the Appalachian region, although it has yet to have a substantial impact on the region’s generation portfolio. However, the financial assistance and incentives provided in the 2009 American Recovery and Reinvestment Act (ARRA) may help increase the pace of renewable energy development in the coming years. Pending climate legislation is also expected to spur new development of renewable energy as the country moves to reduce its carbon emissions. EIA projects under its reference case—which does not account for pending climate legislation—that the share of US electricity generation from renewable energy will grow from 8% in 2007 to 14% of total generation by 2030.

Finally, there’s the depletion of the Central Appalachia’s best coal, which the report calls a “primary factor” that is making the region’s mining industry less competitive.

The reports cites a “striking relationship” that has emerged between labor productivity and the price of Central Appalachian coal. Here’s one of the charts Rory and Evan used to illustrate these trends:

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The average mine mouth price of Central Appalachian coal — from both surface and underground mining — more than doubled between 2000 and 2008. The onset of this price increase corresponds exactly with the beginning of the decline in labor productivity. Click graphic to make it larger.

If this is all a little confusing, well … join the crowd. Even the authors seem to admit that some of this is counter-intuitive:

The cause-and-effect relationship between coal prices and labor productivity is difficult to assess. On the one hand, increases in coal prices allow operators to mine otherwise uneconomical coal reserves, which are thinner and more costly to extract. This could reduce labor productivity when prices are high. On the other hand, decreases in labor productivity would increase production costs and put upward pressure on prices. It is also possible that the decrease in labor productivity is both a cause and an effect of the increase in price.

But consider this:

Labor productivity at Central Appalachian coal mines, on average, rose sharply through the 1990s. This was due to a shift in production to surface mines and drastic improvements in labor productivity for both underground and surface mines. The consequence of the improvements was a sharp reduction in coal mining employment, especially in underground mining. Since productivity peaked in 2000, however, employment has generally improved—not as a result of increased production, but rather as a result of the depletion of the best coal reserves. Labor productivity since then has declined by 25% and 30%, respectively, for surface and underground mining. This contributed to a doubling of coal prices between 2000 and 2008 as more workers were required to produce each ton of coal. The result was a reduced competitiveness of Central Appalachian coal, as illustrated by a sharp decline in demand, and therefore production.

The trends observed since 2000 have occurred even though lower-cost methods of surface mining expanded in use, thus suggesting that future coal production in the region may be facing a significant challenge.

And this:

Significantly, the continued shift to surface mining even after peak labor productivity in 2000 should have increased total labor productivity, because surface mining is the more labor-efficient method of coal production.

… Labor productivity at both surface and underground mines—and therefore total labor productivity—has declined since then. The decline in total productivity suggests that the thickness and economic recoverability of the remaining coal reserves, whether mined by surface or underground methods, is declining. As labor productivity declines, production costs rise at mines, unless technology or transportation improvements offset the increased payroll.

This is similar to what the Mountain Association for Community Economic Development previously reported in its publication, “The Economics of Coal in Kentucky,” concluding that labor productivity in Central Appalachian will continue to decline “by a total of 6 percent over the next five years as producers continue to move into thinner and more geologically challenging seams.”

Now, are there future regulatory challenges facing the coal industry? Yes, and Rory and Evan discuss those — climate legislation and mountaintop removal restrictions — in some detail as well. I think I’m going to save that for a future post, except to point out that they conclude:

Each of these potential challenges will likely further reduce future coal production in the region beyond the reference levels predicted by [the Department of Energy].

But, contrary to the strategies favored to date by the region’s business and political leaders, Rory and Evan suggest the people of Central Appalachia might be better off if they at least tried to prepare for this continued decline in coal production:

As numerous counties within the region depend strongly on coal for their economic well-being, alternative options for economic development should be pursued in order to counter the negative impacts of any reductions in coal production.

It’s become pretty popular among coal state politicians to blame the Obama administration or environmentalists for coal’s problems. You don’t see too much mention of the other challenges facing the industry … well, except if you pay attention to Sen. Robert C. Byrd, D-W.Va., who in his “Embrace the Future” commentary noted:

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Change is no stranger to the coal industry.  Think of the huge changes which came with the onset of the Machine Age in the late 1800’s.  Mechanization has increased coal production and revenues, but also has eliminated jobs, hurting the economies of coal communities. In 1979, there were 62,500 coal miners in the Mountain State. Today there are about 22,000. In recent years, West Virginia has seen record high coal production and record low coal employment.

And change is undeniably upon the coal industry again.  The increased use of mountaintop removal mining means that fewer miners are needed to meet company production goals. Meanwhile the Central Appalachian coal seams that remain to be mined are becoming thinner and more costly to mine. Mountaintop removal mining, a declining national demand for energy, rising mining costs and erratic spot market prices all add up to fewer jobs in the coal fields.

One other thing: It’s not like coalfield leaders couldn’t see this coming.

A 2001 U.S. Geological Survey report warned:

Sufficient, high-quality, thick, bituminous resources remain in (major Appalachian) coal beds and coal zones to last for the next one to two decades at current production. After these beds are mined, given current economic and environmental restrictions, Appalachian basin coal production is expected to decline.

And work prepared by industry consultants as part of the U.S government’s broad Environmental Impact Statement on mountaintop removal cautioned that, even without new limits n valley fills Central Appalachian coal production would decline to between 214 and 240 million tons by 2008. (They were pretty close — the actual 2008 figure was 235 million tons). Hill and Associates, who wrote that study for the EIS, reported that the declining production trend is exacerbated toward the end of the 10-year study period by the fact that significant blocks of higher-quality Central Appalachian reserves are starting to be exhausted…” and that “the better quality coals in the region are slowly but surely being mined out.”

Like the USGS report, the Hill and Associates study came out in 2001 … nearly a decade ago. And still, coalfield politicians aren’t telling their constituents about these challenges, or developing much — if anything — in the way of solutions. Well, unless you consider just complaining about the Obama administration’s “unilateral attack on the coal industry” coming up with a solution.

In their new report, Rory and Evan offer their own suggestions for embracing the future, such as providing more incentives to encourage wind-energy development, biomass and energy efficiency (we’ll get into the specifics more in a future post, too):

… State and local leaders and policy-makers should recognize the economic and regulatory realities facing the region’s coal industry, and should take steps to help diversify coalfield economies. Only by doing so will they ensure the availability of new jobs and sources of revenue for the impacted areas.

And they close by quoting and adding a bit to something Sen. Byrd said:

“West Virginians can choose to anticipate change and adapt to it, or resist and be overrun by it. The time has arrived for the people of the Mountain State to think long and hard about which course they want to choose.” The same is true for all of Central Appalachia.