Alan Stagg, president and CEO of West Virginia-based Stagg Resource Consultants Inc. told a crowd of coal producers and power plant operators in September that “low-sulfur coal plus $2.75 will get you a cup of coffee at Starbucks.”
No one laughed, because the statement made at Platts Coal Marketing Days, Downtown, wasn’t meant as a joke. Mr. Stagg was bemoaning the decline of what was once the most prolific coal producing region in the U.S. — Central Appalachia — where mine closings have deflated local economies and devastated employment prospects.
The decline has been in the works for years, but has been exacerbated in recent years by the confluence of increased pollution controls at power plants, low natural gas prices, slow growth in electric demand, and depleted reserves.
When federal sulfur regulations first surfaced in the 1970s, Central Appalachia — which includes the southern portion of West Virginia, Kentucky and Virginia, and has the lowest sulfur coal in the country — had a natural advantage.
According to a report by West Virginia-based environmental consultants Downstream Strategies, titled “The Decline of Central Appalachian Coal,” production from the region shot up by 50 percent in the 1980s and reached an all-time high in 1990, with 291 million tons pulled from the ground that year.
The region’s second most productive year on record was 1997, seven years after the Clean Air Act Amendments that further limited sulfur had been passed and two years after they took effect.
The rules revolved around acid rain concerns and allowed the utilities to decide how they would limit sulfur emissions. Many chose to buy more low-sulfur coal rather than shell out hundreds of millions of dollars for sulfur scrubbers. By the mid-1990s, about 75 percent of power plants had opted for the cheaper option, according to the report.
By the end of 2012, however, power plants comprising 64 percent of coal-fired generation capacity in the U.S. had installed scrubbers and another 5 percent had plans to do the same, according to the Energy Information Administration. Another 10 percent were planning to retire and 20 percent were mulling the idea of closing versus retrofitting.
In plant after plant, the addition of scrubbers corresponds to a change in the quality of coal burned there, as evidenced by data from the EIA.
At the Cheswick power plant in Springdale — long a staple on environmental groups’ dirtiest power plants list — the average sulfur content of coal burned the first full year after scrubbers were installed in the summer of 2010 was nearly 150 percent higher than in 2009.
Even as the scrubbers were taken offline due to corrosion problems in early 2011, the sulfur shift remained in place, according to monthly data collected by the EIA. The power plant has continued to burn dirtier coal since then.
The same proved true at the John E. Amos plant in Winfield, W.Va., where scrubbers were installed in the first half of 2009. In 2008, average sulfur content of the coal used at the plant was 0.8 percent of the coal’s weight. By 2010, it was 2.5 percent, and for the first nine months of this year it had risen to 3 percent.
“Over the last several decades, the concept of quality has changed,” Mr. Stagg said. “Nowhere (is that) more evident than in Central Appalachia.”
The ability to burn higher sulfur coal has also changed the dynamics and speed of coal purchasing. Power plants are able to use a mix of coals, some higher sulfur and some lower, to control costs, he noted.
Whereas 30 years ago, coal supply contracts could span as much as two or three decades, now a three-year contract is considered a long-term commitment.
“You get a lot of variation that way,” Mr. Stagg said. “It gives them much more flexibility to play the spot market.”
FirstEnergy’s W.H. Sammis power plant in Stratton, Ohio, installed scrubbers in late 2010.
In the two years preceding that, more than 90 percent of its coal was procured through a contract. In the two years following the scrubber installation, that dropped to about 75 percent.
In the past two years of depressed coal prices, the power plant has been able to get about 70 percent of its supply on the spot market, taking advantage of the downturn.
The sulfur content of Sammis’ coal during the years when spot purchases far outpaced contracted supply was about 2.5 times greater than during the years before the scrubbers.
Northern Appalachia’s good news
Across the board, these are bad times for coal.
Production from all but one coal region has declined between 2008 and 2013, but Northern Appalachia saw the mildest decrease at 8 percent and has actually picked up since last year. The Illinois Basin — with its large undeveloped reserves, moderately thick coal beds and favorable mining conditions — gained 33 percent during that five year span.
Northern Appalachia, which includes Pennsylvania, Ohio, Maryland and the northern portion of West Virginia, has similar conditions. Its coal slabs are thick, and there is enough unmined territory to justify longwall mines, the most capital intensive but also the most capital efficient method of getting coal out of the ground.
Central Appalachian coal is tougher to extract, now that so much of it has already been mined. What remains are fragmented segments of “either thick and dirty or thin and clean” coal, Mr. Stagg said.
He predicted that while Northern Appalachia will maintain its market share as a domestic supplier, Central Appalachia will continue to lose its place in the long run.
Sulfur has become so much of a non-issue that Cecil-based Consol Energy Inc. has consistently told investors in its public documents that its customers, scrubbed plants, aren’t looking at sulfur anymore, they’re looking at heat value.
In a public filing in July, Consol reported that 77 percent of its proved and probable reserves — that is, unmined assets the company either knows or expects are economically recoverable — are high sulfur content.
“In the past, some have viewed Consol in a disadvantaged light, because our reserves were by higher sulfur content,” Bill Lyons, then Consol’s CFO said during an earnings call in 2011.
“As our sales volumes and realizations for the quarter will attest, sulfur content has not been a significant issue due to the installation of scrubbers and other pollution control technologies.”
For Alpha Natural Resources, the situation is reversed. About 78 percent of its proven and probable reserves are low in sulfur, according to the company’s annual report. Alpha is heavily concentrated in Central Appalachia, but that no longer places it an at advantage.
“More widespread installation by power generators of technology that reduces sulfur emissions may make high sulfur coal more competitive with our low-sulfur coal,” Alpha warned in that report.
Other changes in the works
Last year, the EPA passed its mercury and air toxics standards, turning some attention to the mercury content of coal.
Mercury varies from mine to mine, rather than basin to basin, according to Steven Winberg, program manager at Batelle Memorial Institute who spent a dozen years in research and development with Consol. Mines in Somerset County, for example, have higher mercury content than mines in Greene, he said.
But the cost to reduce mercury is much less than retrofitting smoke stacks with scrubbers, he said, so Mr. Winberg doesn’t anticipate a significant shift in how coal is sourced due to mercury compliance. Many existing sulfur scrubbers are already ridding the air of as much mercury as will be required under the EPA’s rule.
The Clean Power Plan, EPA’s latest major emissions proposal, which deals with carbon dioxide emissions, may also influence the quality of coal that’s prized at power plants.
While coal with higher heating values contains slightly more carbon, it is generally more desirable because it requires burning less of that kind of coal to achieve the same yield.
“If you look at carbon per unit of electricity that a power plant generates, a high quality fuel will be better off,” said Edward Rubin, a professor of engineering and public policy and mechanical engineering at Carnegie Mellon University.
“The regulation is basically set up to provide an incentive for more efficient power plants,” he said.
Anya Litvak: email@example.com or 412-263-1455.