Biden Plan Would Accelerate Coal Decline

The Biden administration’s proposals to fight climate change would accelerate what has already been a downward decline of the use of coal for generating electricity.

That would further depress railroad coal traffic, industry observers say.

Rob Godby, an economics professor who is deputy director of the University of Wyoming’s Center for Energy Regulation and Policy, said the Biden proposals would accelerate the decline of coal that has been under way for a decade.

During the past 10 years, railroads have seen their coal traffic fall but “black diamonds” still remained a substantial source of revenue.

In 2020, coal was 12 percent of rail freight volume in the United States, figures from the Association of American Railroads show.

Coal was the single largest commodity that Class 1 railroads carried in 2020 and provided $7 billion in revenue.

Yet the use of coal to generate electricy has fallen from 48 percent of the nation’s power supply in 2008 to less than 20 percent last year.

Most coal mined in the United States is used to generate electricity but is also used in steel making and exported to other nations.

Biden has proposed using tax incentives for renewable energy for another decade while making power grid investments to support greater use of wind and solar power.

Godby said those changes, if implemented, will make it difficult for coal to compete on an economic basis with natural gas and renewable sources of energy.

“The bottom line is if this were to happen, you could say the Powder River Basin would almost entirely be shut down,” Godby said referencing a region in Wyoming and Montana served by BNSF and Union Pacific that produces nearly half of U.S. coal.

Godby said some renewable energy projects provide electricity more cheaply than coal, even without subsidies.

Transportation costs can take up three quarters of the delivered cost of coal to a power plant.

Even if Congress were to reject the Biden plan, Godby said coal is living on borrowed time and he expects demand for it to be a shadow of itself by 2035 when very little of the nation’s power will be generated by burning coal.

Already, coal producers are seeking to sell or shut down mines in the Powder River Basin. Arch Resources plans to close the Coal Creek mine in Wyoming in 2022 and reduce production at Black Thunder Mine, the second-largest U.S. coal mine.

The Biden infrastructure plan has proposed establishing as many as 10 power plant carbon capture demonstration projects.

But Godby said for those to be commercially viable, carbon capture would require technology and cost breakthroughs as well as the development of markets for carbon dioxide use.

Fewer Mines Seen as Needed to Boost Coal Industry

A common theme in recent investor calls discussing Class 1 railroad quarterly financial results and the weekly and monthly freight data provided by the Association of American Railroads has been the steady downward trajectory of coal traffic by rail.

Class 1 railroad executives and many industry observers have adopted a pessimistic attitude toward coal, saying that it will continue to lag due to low prices of natural gas used to generate electricity and the closing and planned closing of power plants using coal.

The coal industry itself is undergoing a transformation with some saying there are too many mines for the size of the market.

“There are too many mines and too few customers,” said Rob Godby, an economics professor who is deputy director of the University of Wyoming’s Center for Energy Regulation and Policy, in an interview with Trains magazine.

He said the best thing that could happen to improve the financial health of the coal industry would be a permanent closure of a mine in the Powder River Basin, where there has been little consolidation of operations.

That has resulted in less profitability for the owners of those mines. Some have sought bankruptcy in the past few years.

That included St. Louis-based Arch Resources, which emerged from bankruptcy protection in 2016 and is one of the major players in the Powder River Basin.

Arch said this week it is seeking a buyer for its mines and if can’t sell them it will wind down production in the Power River Basin.

The company said during a third quarter earnings call that it is transitioning away from thermal coal used to generate electricity and instead focusing on metallurgical coal used in steel making.

Coal was used to generate 48 percent of U.S. electricity as recently as 2008.

But the U.S. Energy Information Administration said that has fallen to 20 percent this year.

Last year Arch’s mines in the Powder River Basin produced 75 million tons of coal. It expects to produce 55 million tons this year.

A month ago Arch and one of its chief competitors, Peabody Energy, called off plans to combined operations in the Powder River Basin and elsewhere.

The Federal Trade Commission had opposed the due based on competitive concerns.

UP CEO Sees Coal Traffic Bottoming Out

The decline of coal traffic may have bottomed out for now one railroad CEO believes.

Speaking to the Barclays Industrial Select Conference, Union Pacific head Lance Fritz said only the most efficient power plants that use coal are still in operation.

Natural gas has eclipsed coal as the fuel of choice at many power plants due to its low cost.

Fritz said there are few coal-fired power plants left and those form a baseline of coal loadings.

He doesn’t believe the haulage of coal by railroads will rebound from the extended slump it has been in and which has affected the financial positions of such other Class 1 railroads as Norfolk Southern and CSX.

At UP, coal traffic is down 30 percent thus far in 2020. It declined by 16 percent in 2019.

Much of the coal hauled by UP originates in the Powder River Basin of Wyoming.

Also working to depress the use of coal are increased use of wind and solar energy.

The U.S. Energy Information Administration projects that another wave of closings of coal-fired plants will occur over the next five years.

The agency said that natural gas prices last year were their lowest in the previous three years.

Fritz noted that the loss of coal traffic underlies UP’s stagnant traffic volume over the past 15 years.

“That’s a big, big deal,” Fritz said of the decline of coal traffic. “That in and of itself is tens of thousands of carloads a week.”

Last week UP hauled 15,294 carloads of coal whereas in the same week of 2011 it handled 43,007.

UP’s approach to coal traffic, though, stands in marked contrast to that of western rival BNSF which has been able to retain some of its coal business by cutting rates in an effort to discourage coal-fired plants from switching to natural gas.

For its part, UP has engaged in what it described as “judicious pricing” of its traffic to earn an acceptable return.

Powder River Basin coal traffic peaked in 2008. Since then BNSF coal volume from that region has fallen 24 percent while UP’s volume has plummeted by 59 percent.

BNSF’s coal volume is down 6 percent this year and fell 6 percent last year.

Information the carriers reported to the U.S. Surface Transportation Board indicate that last week BNSF dispatched 35 coal trains from the Powder River Basin while UP had 12.

Michigan Utility Wins Rate Case Against CSX

A Michigan utility company has won a rate case against CSX before the U.S. Surface Transportation Board.

The STB recently sided with Consumers Energy of Jackson, Michigan, against CSX in a case filed in January 2015 that challenged the rates CSX charged to haul coal to the utility’s J.H. Campbell generating plant near West Olive, Michigan.

CSX picked up the Powder River Basin coal from BNSF in Chicago and hauled it 235 route miles to the power plant. The STB agreed with the utility company and set a lower rate.

However, CSX has asked the Board to extend the proceeding to Feb. 20 during which time it will decide whether to ask the board to reconsider its ruling.

Trains magazine cited an unidentified attorney who was said to be familiar with the case as saying that it has become rare in recent years for shippers to win rate challenge disputes.

The attorney said most rate cases have involved chemical companies, but the volumes of cars in question and the varied distribution of chemical products makes it difficult for the STB to determine if the rates charged by the railroads are reasonable.

In the Consumer Energy case, the STB said that CSX was the “dominant” carrier in the market and the utility was a captive shipper.

The STB staff used the “stand-alone cost” method to determine if CSX’s revenue unfairly exceeded the cost of hauling the coal.

In response, CSX argued that Consumers Energy had an alternative to rail, including by water because the generating plant was close to the shore of Lake Michigan.

CSX said that a nearby generating plant operated by Consumers Energy on the lake receives coal by boat.

In rejecting the CSX arguments, the STB determined that the railroad had an unusually high revenue-to-variable cost ratio because of the costs of moving coal through the Chicago gateway and maintaining the rail line along the eastern shore of Lake Michigan.

BNSF’s Rose Doesn’t See Coal Volumes Returning

A top U.S. Class 1 railroad executive told an energy conference that coal traffic on the railroads is in decline and that it is not going to recover.

In fact, Matthew K. Rose, the executive chairman of BNSF, fears that the Power River Basin line may become stranded assets.

Rose, speaking at the U.S. Energy Information Agency’s 2015 EIA Energy Conference, said changing energy policies have led to falling coal volumes.

In 2006, BNSF moved 287 million tons of coal out of the Powder River Basin in Wyoming and Montana.

“It was a time of heavy coal demand,” Rose said. “We had a severe weather disruption in the basin that constricted deliveries going into the summer. The administration and Capitol Hill strongly believed that our investment in our coal network was insufficient and that much more investment was needed if we were to meet the forecast of demand going forward. We invested heavily and now the capacity and the operations of the [Powder River Basin] lines are very, very impressive.”

Less than a decade later, Rose doesn’t believe that BNSF will see that level of coal volume again.

“That leaves us with millions of dollars in investment in what will eventually be stranded assets,” he said.

For now, Powder River coal remains important to BNSF’s bottom line, accounting for about 20 percent of its traffic and 25 percent of its revenue.

Rose doesn’t believe that the same scenario will play out with crude oil, “because other commodities benefit from the expansion of these crude routes.”