Dirtiest U.S. Coal Becoming Most Popular on EPA Rules

The dirtiest coal in the U.S. is becoming the most popular, thanks to tightening emission standards forcing power plants to reduce pollutants.

Demand for the fuel from the Illinois Basin in President Barack Obama’s home state climbed last year to the highest level since 1990 as sales of nearby Appalachian coal dipped and consumption of the product from Powder River Basin mines in Wyoming grew at a slower pace.

Illinois basin coal has greater sulfur content than the other coals, and either costs less or has a higher heat content, meaning it’s sought after by utilities forced to install scrubbers in their power plants by a succession of federal laws and Environmental Protection Agency rules. Its share of U.S. production will climb to 20 percent by 2040 from 13 percent currently, according to the Energy Information Administration.

“Here we are growing while the industry’s shrinking,” Mike Beyer, chief executive officer of Foresight Energy LP, said last week at the company’s Viking Mine in Macedonia, Illinois. “The market is not going away. It’s not going to zero.”

Illinois has the second-biggest reserves in the U.S., with 104 billion tons of coal, enough to power the country for 163 years at 2014 consumption levels, according to the EIA. It fell from favor after 1990 with expansion of the Clean Air Act and limits placed on sulfur dioxide emissions, which cause acid rain. In response, utilities began to install scrubbers to remove the contaminants or just shut down older, less efficient operations.

Mercury Rule

Another rule, the Mercury and Air Toxics Standards, takes effect next year, and utilities can comply by equipping their coal-fired power plants with the same kind of scrubbers that remove sulfur dioxide.

About 217 gigawatts, or 72 percent, of U.S. coal plants currently have scrubbers and 252 gigawatts, or 100 percent, will have the technology by 2025, Wood MacKenzie, an Edinburgh-based energy consultant, estimates.

By the end of this decade 67 gigawatts of coal-fired electricity will have been shuttered as utilities comply with the mercury rule, according to Wood MacKenzie. One gigawatt is enough to power 708,400 U.S. households, according to Energy Department data.

Carbon Emissions

The closures mean the industry has been effectively prepared for the Obama administration’s new rules limiting carbon dioxide emissions. The U.S. will still burn 616 million to 636 million tons of coal to produce power in 2020. Coal’s share of the country’s power generation will fall to 33 percent in 2020 and 30 percent to 31 percent in 2030 under the proposed curbs, compared with an increase to 41 percent under existing rules, EPA figures show.

As a result, Illinois coal is flourishing. Foresight held its initial public offering in June. White Oak Resources LLC is scheduled to begin output at its Mine No. 1 operation in Hamilton County, Illinois, by October.

Production from Northern Appalachia is projected to decline 1.9 percent next year from this year and Central Appalachia 14 percent, EIA data show.

Wyoming’s Powder River Basin will increase 4.4 percent, while the Eastern Interior, which includes Illinois, is forecast to jump 9.4 percent, EIA, the Energy Department’s statistical arm, said in a May 7 report.

Appalachia Closings

Appalachia has seen a spate of mine closings in recent years, including announcements this year by Alpha Natural Resources Inc. and Arch Coal Inc.

“The Illinois Basin is really going to benefit the most,” Hans Daniels, executive vice president of Doyle Trading Consultants LLC, an industry consultant, said in a telephone interview. “You have the ideal location for mines. They’re in the heart of coal-burning country.”

Foresight, started by billionaire Chris Cline, has mechanized longwalls, a method of mining in which a shearer slices coal three and a half feet deep along a 1,400-foot-wide face, at four different operations.

While Foresight estimates the cost of installing the technology at as much as $425 million per mine, it reaps returns through higher productivity.

The company plans to produce 24 million tons of coal this year from 19 million tons in 2013, Beyer said. It’s targeted five other sites for possible longwall installations that would give the company output of 60 million tons “over the next several years” he said.

Foresight Capacity

The Viking mine, which began operating in June, gives the company capacity to ship 32 million tons. Some 800 feet below ground and a four mile ride to the coalface, the longwall machine moves back and forth in the ghostly caverns like a giant meat slicer at a delicatessen. The coal collapses onto a two-chain belt that moves it at a pace of 3,000 tons an hour.

Illinois Basin coal cost $44 a ton on Aug. 29, 22 percent cheaper than Central Appalachia and 30 percent less than Northern Appalachia. While it’s almost four times more costly than Powder River Basin, it has heat content 34 percent greater.

Coal demand for electricity generation will increase 2.8 percent to 882.2 million tons from 2013, the Energy Department’s statistical arm said in its Aug. 12 Short-Term Energy Outlook. While thermal coal is used to make power, the metallurgical variety is needed to forge steel.

Futures Contract

CME Group Inc., owner of the New York Mercantile Exchange, said Sept. 2 that it plans to start a futures contract for Illinois Basin coal next month as domestic consumption of the fuel expands.

“This growth is being driven in part by recent technical improvements and widespread adoption by U.S. power plans of scrubber technology, which reduces sulfur dioxide emissions and makes Illinois Basin coal a viable alternative to lower-sulfur fuels,” CME said.

The characteristics that make Illinois conducive for growing crops like corn and soybeans make it easier to mine since the reserves are thick and contiguous under the flat land, unlike the rolling terrain of Appalachia, said John Hanou, an industry consultant whose company is based in Annapolis, Maryland.

Beyer said that geology and a shorter haul to power plants in the Midwest and Southeast relative to Powder River Basin, make Illinois Basin increasingly competitive.

“We’ve invested $2 billion,” he said. “You don’t invest $2 billion in this environment without knowing you’re hedged.”

Other companies are moving ahead with plans to ramp up production.

Hallador Investment

In addition to White Oak Resources opening a mine in Illinois, Hallador Energy Co.’s subsidiary Sunrise Coal LLC bought Vectren Fuel Inc. in July to gain access to underground mines in Southwestern Indiana, regulatory filings show. The basin includes Illinois, Indiana and parts of western Kentucky.

“Structurally, the U.S. steam market has a lot of issues and the Illinois Basin’s not immune to those issues,” Mark Levin, an analyst at BB&T Capital Markets, based in Richmond, Virginia, said in an Aug. 21 telephone interview. “It’s still the best house on a bad block.”