The Energy Transition in Western Coal Country

Robert Godby, University of Wyoming AUBER Conference, Albuquerque NM

October 22, 2017

Times Change…

A decade ago… • Oil Prices: $80-$100/bbl - Now $50-$55/bbl (-35%+) • Nat. Gas Prices: $6-$8+/mmbtu - Now $3.00 (-50%+) • Coal Prices: ~$13.00/st - Now $11.50-$11.75 (-12%)

Production down 25%+

• Climate regulation ?????? - Now ??????

Energy Transition in West. Coal Country

• Focus on Wyoming • 2nd largest total energy producer in US

• Largest US coal producer • 6th largest nat. gas producer • 8th largest oil producer

• Changes and impacts in Wyoming have been abrupt. • Major changes in economic conditions and state revenues over past 3 years. • Attitudes and mindsets have not kept up with changing conditions

Wyoming: Coal Changes • Wyoming produces over 40%

of US total coal production. • More coal than next 6

states combined, from 16 active mines.

• Over 96% comes from 12 mines in the Powder River Basin.

• Peak production: 2008 = 468 million tons.

• Fell to 297 million tons in 2016.

• 2017 production expected to be in the 310-330 million ton range.

Powder River Basin • The Wyoming Powder River Basin has been mined for over 100 years,

but only began exporting to the rest of the country in the 1970s. • Sub-bituminous coal (8,700 btu/lb)

• Reasons for growth from less than 1% of US production to dominance in the domestic thermal market today:

• Energy crisis in the 1970s and perceived need to develop domestic energy sources.

• Economies of scale – reserves allow surface mining on a massive scale.

• Rail deregulation results in reduced transport costs in 1980s. • Very low sulfur content (approx. 1/10 the content of Illinois coal)

makes use very appealing after Clean Air Act regulations limit sulfur dioxide emissions on new and then existing plants with 1990 CAA amendments.

Domestic Markets

Source: EIA, 2015

Texas, 14.7%

Illinois, 12.1%

Missouri, 10.8%

Wyoming, 7.5%

Iowa, 6.0% Wisconsin, 5.8%

Oklahoma, 4.8%

Kansas, 4.7%

Michigan, 4.7%

Nebraska, 4.2%

Arkansas, 3.9%

Georgia, 3.0%

Colorado, 2.9%

Alabama, 2.9%

Minnesota, 2.8% Kentucky, 2.3%

Louisiana, 1.9% Arizona, 1.9% Tennessee, 0.9%

Indiana, 0.6% Oregon, 0.4% South Dakota, 0.4%

Other States: Nevada: 0.3% Washington: 0.2% Mississippi: 0.2% New York: 0.1% N. Dakota: 0.1% Maryland: 0.1% Montana, Idaho, Utah, Ohio all less than 0.1%

Scale Economies

0 20 40 60 80 100 120

BuckskinFreedom (ND)

RawhideSpring Creek (MT)

Belle AyrEagle Butte

Cordero RojoAntelope

Black ThunderNorth Antelope Rochelle

Millions Short Tons

Top 10 Producing Coal Mines by Tonnage in the U.S. (2015)

Wyoming

Other States

Two largest mines in Wyoming accounted for over 23% of US coal production.

Recent Production

Source: MHSA

• PRB production in 2016: 287 million tons.

• Current PRB pace: 310-320 million tons (~10% increase over 2016).

63,098,891

57,586,690

84,029,759 82,519,538 77,675,077

69,546,908

82,595,769

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3

Total PRB Quarterly Production 2016-17

Mining Employment

Source: MHSA

• 18% decline in employment since 2015.

• 9% increase over past year.

5,332

4,561 4,439 4,703 4,725 4,739 4,843

0

1,000

2,000

3,000

4,000

5,000

6,000

2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3

Total PRB Quarterly Mining Employment 2016-17

Severance Tax Revenue Forecasts

• All fossil-fuel severance revenues are forecast to fall in Wyoming over the next five years.

• Due to current market conditions, and potential future regulations.

• This has had significant impact on state budgets.

• Note coal is the single relatively “stable” source of funds…

Source: Wyoming Consensus Revenue Estimating Group, January 2017.

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

1997

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Wyoming Severance Tax Revenues

Crude Oil Natural Gas Coal Trona Other Total

Projected

Threats to the Wyoming Coal Industry • “Fundamental” Market challenges (short term)

• Continued low natural gas prices • Continued weak electricity demand growth • Renewable generation growth

• Long term challenges • GHG regulation (domestic and foreign)

• Lack of new coal plant construction • Increased renewable penetration • Increased coal production costs.

Impact on Electricity Production

0%

10%

20%

30%

40%

50%

60%

1950 1960 1970 1980 1990 2000 2010

Annual share of total electricity generation by source (1950 - 2017Q2)

Coal (30%) Natural Gas (29%)

Nuclear (20%)

Non-Hydro Renewable (9%) Hydro (9%)

Other (2%)

% of Total

Generation Forecast (Coal vs. Gas)

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Generation Shares: Recent and Projected

Natural Gas Share % Coal Share %

Actual Projected

Source: EIA Short Term Economic Outlook, May 9, 2017

Near term outcome: • coal and gas

both produce approx. 31% share through 2018.

Near Term Coal Market Forecast

Long Term Coal Forecast

Technological/Market Impacts on Rates

Potential Game Changers: 1. Short-term:

• Changes in nat. gas prices from forecast (high or low). • Possible changes in valuation of coal for fuel

security/reliability/resilience reasons in elec. markets. 2. Long term:

• Changes in GHG regulation (domestic and foreign) • Increased renewable penetration/PTC changes • Changes in elec. demand from trend (e.g. EV use) • Development of international markets (Japan, Korea) • Major breakthroughs in technology

• Breakthroughs in CCS processes/CO2 uses or alternative coal uses.

Opportunity in Wyoming

540.5

600

600.3

900

2878

3200.6

4078.2

5000

7270

0 1000 2000 3000 4000 5000 6000 7000 8000

IL

CO

ME

KS

TX

SD

NM

OK

WY

Planned/Proposed Capacity Increase (MW)

20 Largest Wind Projects in US: Capacity Impact by State (MW)

Source: S&P Global Market Intelligence 20 largest wind projects in US (August 2017)

Implications for Wyoming • Potential impact of 8,000MW of new wind construction:

– Over $13 billion in potential investment planned in the state in next 5 years,

– Over $9 billion in new economic activity in the state, – Almost $4 billion in new labor income, – Over $2.5 billion in new tax revenues over 20-year lifetime of projects at

current tax rates, – Almost 68,000 job-years of new employment

• 28,000 job-years of new employment in the initial 5-year construction phase (average 5,600/year)

• 40,000 job-years of new employment over 20 years of operation (average 2,000 jobs/year)

Policy? • Wyoming policy has not adapted to current conditions and

may not be paying attention to fact that wind development occurs in a competitive market. – Taxation/Incentives? (Wyoming taxes elec. production from wind) – Regulation practices and policies? – Perceived interest by state officials and legislators? – Infrastructure and development initiatives and support?

State concerns about Wind: Ironic? • Protection of cultural values?

– Landscape – Heritage sites

• Species protection? – Wildlife/environmental impacts

• Economic impacts? – Recreational/Tourism impacts – Access/use of lands

Conclusions • Energy transition is being driven by market and technological trends

in the industry – far less so by regulation. • Electricity market outcomes, changes in technology development, and

consumer/political preferences. • Have had significant economic and revenue impacts • Recent changes have actually lowered prices and emissions.

• Need more than ever for economic and business research to help policy-makers

• Impact analyses (transition impacts and opportunities) • Revenue analysis (existing and new policies) • Techno-economic studies – opportunity analysis

Robert Godby Director, Center for Energy Economics and Public Policy Department of Economics University of Wyoming rgodby@uwyo.edu