POWER August 2017 - 44

ENERGY MARKETS
4. Railroads are moving fewer loads of coal. An analysis of rail rates over the past
few years shows railroad companies have been mostly unwilling to lower their prices for moving
coal, and have accepted the fact that they will be moving less of it over time. Source: POWER
will be negligible, and incremental natural
gas-fired combined cycle additions
through 2020 will further constrain any
potential growth.
these natural gas prices (approximately
$0.75/MMBtu below 2017 base natural gas
pricing), coal volumes across all basins drop
by 185 million tons compared to 2017 base
levels, or 21% of 2015 production. Powder
River Basin (PRB) coal exhibited the largest
decline, absorbing 99 million tons of lost
tonnage or 24% of 2015 production, while
the Appalachian and Illinois basins could
see volume declines reaching 14% to 17%
of 2015 production. Gas demand would increase
by 7.0 billion cubic feet (Bcf) per day.
Mid-Gas Case ($3.00/MMBtu). At these
natural gas prices (approximately $0.25/
MMBtu below 2017 base natural gas pricing),
coal volumes across all basins drop 69
million tons compared to 2017 base levels,
or 8% of 2015 coal production. PRB coal
would again see the largest decline, losing
38 million tons or 9% of 2015 production,
while the Appalachian and Illinois basins
could see volume losses comprising 5% to
7% of 2015 volumes. Gas demand would
increase by 2.6 Bcf/day.
High-Gas Case ($4.00/MMBtu). At
these natural gas prices (approximately
$0.75/MMBtu above 2017 base natural gas
pricing), coal volumes would increase approximately
129 million tons compared to
2017 base levels. PRB coal would again
comprise the lion's share of swing volumes,
with an incremental 68 million tons of demand.
Central and Northern Appalachian basins
could also see a combined incremental
27 million tons of coal burn as a number of
Mid-Atlantic coal units become competitive
versus regional gas plants.
Two clear conclusions emerged:
44
■ Swing coal production potential is big.
At current coal price levels, PA's results
reflect a possible maximum swing of
315 million tons of power sector coal
burn across the full range of natural gas
prices examined.
■ Peak coal is in the past. Even under the
High-Gas Case, total U.S. coal consumption
would top out at approximately 790
million tons, compared to 1,046 million
tons in 2008 (peak historical levels).
Even if closed coal-fired facilities could
What Role Will the Railroads Play?
The railroad response to the severe decline in
coal production and consumption during the
2008-2016 period has been surprising and
instructive. Because the railroads often have
very limited competition and much higher
margins than coal producers, they have more
ability, but less market pressure, to reduce
margins than do coal producers. There are
four major railroads that originate U.S. coal:
Burlington Northern Santa Fe (BNSF) and
Union Pacific (UP) in the West, and CSX
Transportation (CSX) and Norfolk Southern
(NS) in the East and Midwest. Shortlines and
other Class I's handle U.S. coals as well, but
these four are the primary carriers.
While coal prices from the PRB declined
substantially during this time period, the railroad
response was minimal. BNSF was more
responsive than UP, including offering some
spot pricing into Texas that was tied to gas
prices, but rail rates stayed largely static, and
it is unclear how much additional volume the
more aggressive BNSF rates generated. The
railroads chose to accept major declines in
coal tonnage shipped rather than make major
reductions in rates.
The effects were similar in the East. Neither
CSX nor NS seems to have attempted
to compete with natural gas-fired generation
on a large scale anywhere in the eastern U.S.
Both CSX and NS instead appeared to have
accepted large losses in coal volume (totaling
The net effect is a U.S. coal production
sector with significantly less capacity
than it had three years ago, and likely
less ability to rapidly respond to market
demand fluctuations. Greater price
volatility is possible as a result.
be unretired, those higher-cost facilities
would burn much less than the 100 million
tons they consumed in 2008 given
lower expected natural gas prices in today's
environment. Over this period, the
effect of Trump-era loosening of Environmental
Protection Agency regulations
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about 50% between 2008 and 2016, including
a 25% decline during the past two years
alone) rather than making major reductions
in rail rates. While the carriers probably
could not have reduced rates sufficiently to
avoid some losses of coal volume to cheap
natural gas, their failure to respond seemed
POWER | August 2017

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POWER August 2017

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