US coal demand to fall despite retirement shift

  • Market: Coal, Electricity
  • 02/01/24

Coal demand in the US may continue its downward trend in 2024 even though fewer power plant units are scheduled to close and some retirements have been delayed.

Coal-fired power plant unit retirements in 2024 are projected to number between six and eight, according to US Energy Information Administration (EIA) estimates and company announcements recorded by Argus. That is down from 22 units permanently closed in 2023.

The current expectation for 2024 coal plant retirements also is slightly lower than what the EIA was projecting at the start of 2023. In addition, four fewer coal units closed in 2023 than had been expected at the start of the year. Some power plant retirements have been delayed or have been flagged by grid operators as temporarily necessary for grid reliability.

But market fundamentals, including more competitive natural gas prices and expanding renewable generation capacity, are expected to continue to be less supportive of coal-fired generation and coal demand this year.

"There's a lot of questions that go into these coal unit [retirement] delays, including how long grids need these units to continue operating during peak demand," said Ian Lange, associate professor at Colorado School of Mines. "It could just be for a few hours or a few days in the winter... but the short period of operation makes me think it will probably not significantly impact coal demand."

The latest projections from the EIA have coal consumption by US electric power plants falling by 10pc this year to 346.5mn short tons (314.3mn metric tonnes).

The biggest shift in coal retirements in 2023 appears to have been in the PJM Interconnection. The grid operator initially had 11 coal units retiring in the first half of 2023, taking a combined capacity of 5,681.2MW offline. But two of those unit retirements were withdrawn after Omnis Fuel Technologies in August reopened the 1,200MW Pleasants power station in West Virginia with plans to eventually add technology to extract hydrogen from coal and run the plant on hydrogen.

For 2024, PJM so far has only one plant scheduled to close, AES' 180MW Warrior Run plant, according to the generation deactivations page on the grid operator's website.

Two coal units in the Midcontinent Independent System Operator (MISO) — WEC Energy's South Oak Creek units 5 and 6 — are expected to close in 2024. WEC previously was expected to also retire South Oak Creek units 7 and 8 in 2024, but announced in June 2022 that it was going to extend operations of those units until "late 2025."

Elsewhere, Duke Energy delayed retirement plans of the remaining two coal units of the GG Allen plant in North Carolina to "by 2025" instead of the end of 2023. And the Federal Energy Regulatory Commission recently approved plans for MISO to extend its system support reliability agreement with Ameren's Rush Island plant in Missouri until at least 1 September 2024. MISO also has asked for permission to extend the reliability agreement it has with Manitowoc Public Utilities' Lakefront 9 plant in Wisconsin beyond its 31 January 2024 expiration date.

PJM has also identified some potential reliability issues that would affect zones that stretch into six states in the grid if Talen Energy were to deactivate the Brandon Shores power plant in 2025, shutting down 1,281.6MW of generating capacity.

Many utilities are likely to use units they have extended retirement dates for as reserve capacity for peak demand seasons instead of using them as baseload generation, Lange said. Some generators already have been operating older coal units at lower rates both because of market conditions as well as environmental regulations. They also are girding for potential tighter regulations in the future.

Even if utilities use the units more frequently, they may have little need to make significant coal purchases. Inventories at most power plants remained above normal going into 2024, following lower than expected coal-fired generation and consumption in 2023.

Coal-fired generation in PJM and MISO has lagged behind year-earlier levels from January-November, while natural gas generation rose for nearly all of 2023 because of lower prices and increased capacity. Average renewable generation fell slightly from year earlier levels even though generators installed more wind, solar and other technology.

In addition, some utility buyers have asked producers to stall shipments that were scheduled for 2023. That, along with other market fundamentals, will likely offset any increase in coal-fired generation that could have been expected from the slower capacity cuts.

PJM coal shipmentsst
StateJan-Oct 2022Jan-Oct 2023±
Delaware83,97171,789-15%
Illinois23,184,01419,119,430-18%
Indiana20,035,94918,421,354-8%
Kentucky22,987,04123,078,7580%
Maryland1,583,187926,993-41%
Michigan15,404,73711,260,903-27%
New Jersey183,955 - -100%
North Carolina4,863,0894,614,632-5%
Ohio14,242,14312,672,343-11%
Pennsylvania 11,080,6415,115,860-54%
Tennessee4,244,6602,835,083-33%
Virginia1,584,570916,898-42%
West Virginia 18,746,44117,052,955-9%
TOTAL138,224,398116,086,998-16%
MISO coal shipmentsst
StateJan-Oct 2022Jan-Oct 2023±
Arkansas10,725,338317,518-97%
Illinois23,184,01419,119,430-18%
Indiana20,035,94918,421,354-8%
Iowa10,735,30210,802,9111%
Kentucky22,987,04123,078,7580%
Louisiana4,545,4624,377,569-4%
Michigan15,404,73711,260,903-27%
Minnesota8,775,7466,959,659-21%
Mississippi4,043,1263,388,542-16%
Missouri24,511,35423,026,633-6%
Montana5,826,0465,486,268-6%
North Dakota17,981,34016,489,642-8%
South Dakota1,254,330856,134-32%
Texas48,562,24745,502,403-6%
Wisconsin10,377,64410,605,5982%
TOTAL195,040,324180,256,374-8%

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We have not seen any problems, knock on wood, with our rail shipments post the incident. What are your long-term projections for metallurgical coal given expectations that low-volatile coal reserves will shrink in coming decades and the steel industry could be in oversupply? Low vol coal has traditionally been the highest priced coal and the dearest, if you will. High vol A coal has over the last few years grown in importance, and to the extent that there is any new increase in production in the US, it's high vol. What we perceive is that there is going to be a crowding in the high vol space. As a result, our increase in production is primarily in low vol. As far as the demand side is concerned, we do not believe that blast furnace steel demand is going to decline anytime soon. There's a lot of noise from the green community that hydrogen is going to replace coal in blast furnaces. We took some advice on that from the IEA…and when that question was posed (to IEA), the answer that was given was it would take about $1.5 trillion to build a pilot plant using hydrogen by 2035 and probably about another equal or greater sum to build a commercial facility by 2040. So, I don't lose a lot of sleep on the demand for coal for blast furnaces. What I do see shifting, however, is the US has held relatively steady at about 20mn short tons (18.1mn metric tonnes) of met coal demand over the last 10 to 15 years. The growth is clearly overseas, and the growth is clearly at the moment in Asia. When we started back in 2017, and 2018 was really our first year of production, we predominantly sold coal domestically; I think 80pc of our coal went to US steel mills. Now that is almost reversed. We're going to sell probably this year, 70pc overseas, and about a third or less domestically. With Europe moving towards electric arc furnace technology and significant new blast furnace capacity coming online in Asia, what kind of role will the US play as a coal supplier over the coming years? It is cheaper to use a blast furnace than electric arc. And the steel that they (Asian companies) mostly require is the heavier steel for cars and buildings and things of that nature. So, they have a bias towards blast furnace capacity. The US and Europe are very developed economies that are trying to go and wean away from coal, (while) the rest of the world is aggressively moving further into coal. People will shake their heads at the cost that European and American consumers will start to have to pay for that privilege. We see market growth is still there, but it's a different kind of growth. It will be more in the Asian markets, predominantly some in Europe, some in South America and Africa. The low vol coal demand in Asia is extremely strong because while they are able to buy high vol product from Australia very inexpensively, they do not have the low vol production. They need that to blend up to get the proper mix in their blast furnaces. There is a very good future for low vol, and that is the direction we are positioning ourselves. How confident is Ramaco about securing its investments in the longer run given the emphasis on ESG? What I see is sort of a dichotomy. In the thermal coal business, there's not a lot of investment in new mining there for the obvious reason that their customer base is declining. On the met side, it is a bit shortsighted from an investment standpoint because of the composition of the ownership of met coal companies. Virtually every major metallurgical coal producer except for us went through bankruptcy and post-bankruptcy proceedings. Their board composition became essentially distressed debt investors...Their interest was not developing a long-term coal company. Strategically their vision was: "How can we most quickly get money back out of that coal company?" We are certainly the only coal company that is doubling in size. We produced a little under 4mn st last year. We will be at about 4.5mn st this year. We can maybe go higher, depending upon the market. The market is not strong right now. The other issue (for coal producers) even when they weren't doing special dividends, is they've now shifted to doing large-scale share buybacks. You are starting to see the cost curve increase for most domestic coal producers. What you haven't seen, but I think you will probably find over the next probably 18 to 24 months, is you will begin to see depletion kick in. The amount of coal that they are able to produce from their existing operation will begin to decline. 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