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Coal’s share of US power generation may fall to 11% by 2030: Moody’s

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Source: Google, July 12, 2019

Demand for US thermal coal will “erode significantly” between 2020 and 2030 as total use for US power generation could fall to as little as 11% based on scheduled and likely retirements, Moody’s Investors Service wrote in a report released this week.



Mines in the Powder River Basin are expected to be the hardest hit as thermal coal generation declines. The operations are run by companies that have all gone through or are undergoing bankruptcy restructuring, such as Blackjewel, Cloud Peak Energy, Westmoreland Coal, Arch Coal and Peabody Energy.



Natural gas generation will replace most of the thermal coal generating capacity set for retirement as the US coal industry contracts and becomes ever more reliant on export markets, according to Moody’s.



“The pace and magnitude of the decline in coal demand for power generation remains uncertain. But the closures of coal-fired power plants already announced, plus other likely closures such as power plants more than 50 years old, would reduce coal to as little as 11% of total U.S. power generation by 2030,” the report said. “This drop would represent a substantial reduction from today’s mid-20% contribution to power generation, and the continuation of an ongoing secular decline in thermal coal demand.”



While many of the remaining coal-fired power plants in the US are not fully utilized, the Moody’s report said capacity factors at those plants are also unlikely to increase even as other plants retire. According to the report, domestic utilities consumed about 84% of the coal produced in the US in 2018.



“The destruction of that demand will be too significant for the coal industry to replace just through greater participation in other markets, such as industrial or home-heating uses, or by increased exports, whose profitability over the cycle depends on relatively high prices because of the high costs of delivering some U.S.-produced coal to distant growth markets,” said Benjamin Nelson, a senior credit officer and lead coal analyst with Moody’s.



Fitch Ratings said in an emailed statement that despite the recent finalization of new coal-friendly power plant regulations from the Trump administration, the coal sector will continue to struggle.



“The new rule may result in a slower decline in coal-fired generation; however, it will not change the dynamics that have driven dramatic increases in both natural-gas fired and renewable generation,” Fitch Ratings said in a June 25 statement. “Competition from natural gas, state-level renewable mandates and increasing interest in renewables from consumers, local governments and investors are expected to drive public power issuers toward emission reduction strategies.”



Seaport Global Securities analyst Mark Levin also recently noted that with Henry Hub gas prices lower than $2.30/MMBtu, it is little surprise that coal continues to lose market share. In the first three months of the year, coal’s share of the US electric generation mix was just 26%, compared to natural gas at 34% and renewable energy at 16%, Levin wrote.



“We expect those numbers to get worse, not better, in the coming months,” Levin said of coal’s share of domestic generation.



COAL EXPORTS TO GROW
Moody’s estimates that exports will make up more than a quarter of US coal sales by the early to mid-2020s, assuming that thermal and metallurgical coal markets continue to support reasonable profits. Cash flow will be volatile because many US producers do not have cost structures that can compete when the commodity cycle drives prices down, Moody’s added.



“A meaningful and sustained increase in the volume of coal exported will be challenging, particularly with risks to the economics of coal-fired generation rising in Asia,” Moody’s said. “Exports from U.S. producers will remain a small portion of the global coal trade, with much higher export volumes from countries closer to growth markets like Australia, Russia, and Indonesia, and this will be an ongoing and increasingly significant challenge for domestic producers.”



Moody’s maintains a stable outlook overall for the industry as healthy cash margins on metallurgical coal and existing contracts are expected to offset some of the sector’s struggles. As a result of robust markets for metallurgical coal used in steelmaking, more companies are expected to shift toward a focus on metallurgical coal, the rating agency added.

News Source: Platts

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