Requiem for coal
It seems that most financial stories these days must begin with “due to the coronavirus,” so here goes: due to the coronavirus, the use of coal in the production of electricity has plummeted so far this year. But while it is true that the virus-related shutdown has kneecapped energy consumption, the demise of coal as a viable energy source was well underway before the pandemic. COVID-19 just gave it a push.
And while the environmental and health benefits are manifest, the dramatic shift toward other sources was driven by a much more fundamental force: economics. The war on coal was instigated by activists, but it was ended by investors, and coal has been vanquished.
According to the U.S. Energy Information Agency, coal-fired electricity generation in 2019 fell to the lowest level in 42 years. Cheaper and cleaner natural gas supplanted much of the demand, but renewables collectively surpassed coal for the first time. Less than one quarter of U.S. electricity came from coal last year, down from about half just 12 years ago.
Meanwhile, employment in the mining of the stuff has fallen by half since 2012 and now comprises just 0.03% of the civilian labor force. And the trend is sure to accelerate. EIA still projects that coal will supply 13% of U.S. electricity by 2050, but that number is almost surely too high. Here in the Tennessee Valley, TVA shuttered one of its six remaining plants in February and announced the closing of another in 2023. The producer has already reduced its share of coal-fired output from 58% in 2007 to just 17% in 2019.
And the United States is behind the curve relative to the rest of developed world. In the United Kingdom, where coal stoked the Industrial Revolution and once provided 80% of British electricity, there will be zero operational coal-fired plants by 2025. Germany plans a total phaseout by 2038. And even China and India, while still heavily dependent, are taking significant steps to promote more renewable replacements.
The scientific consensus is overwhelming regarding the external costs of coal to human health and the environment. Electrical generation from coal produces 2.2 pounds of carbon dioxide emissions per kilowatt hour, compared with just 0.9 pounds from natural gas. A recent study from the University of San Diego estimates the incremental shift away from coal saved 22,000 human lives between 2005 and 2016, and increased the yield of grain crops by 570 million bushels.
Another study from Duke University concluded that conversion of all current coal-fired production to natural gas would result in an annual savings of 12 billion gallons of water, 260% of current U.S. industrial water use. Not to mention the improvement in air quality, widely noted in the wake of the virus-related interregnum of electric consumption.
And yet, the main driver has not been the societal benefit, but the unsentimental laws of economics. Thanks to abundant supplies, the cost per kilowatt of natural gas-fired generation is now less than coal, not to mention the significant ancillary costs of remediation and disposal of the byproducts of burning coal.
And now a new wrinkle: investors are bailing. Several large insurance companies are either reducing exposure or refusing to insure coalrelated extraction or generation projects after 2030, fearing the liability of environmental and health claims that are certain to multiply. And if a major capital investment project cannot get insurance, it will struggle to find investors. With seven coal mining bankruptcies just last year, the smart money is washing its hands of coal.
It is especially powerful when doing the right thing coincides with doing the profitable thing. So long, coal.
Chris Hopkins is a vice president and portfolio manager of Barnett & Co. in Chattanooga.