The Decline of Central Appalachian Coal and the Need for Economic Diversification Rory McIlmoil Evan Hansen January 19, 2010 Downstream Strategies 219 Wall Street Morgantown, WV 26505 www.downstreamstrategies.com Thinking Downstream White Paper #1 The Decline of Central Appalachian Coal and the Need for Economic Diversification Rory McIlmoil and Evan Hansen ABOUT THE AUTHORS Rory McIlmoil, M.A., Staff Research Analyst, Energy and Climate Change Program. Mr. McIlmoil has a background in environmental science and policy with a focus on analysis and presentation of scientific and economic data relevant to environmental policy and energy development. Evan Hansen, M.S., Principal, Environmental Policy Program. Mr. Hansen founded Downstream Strategies and has 20 years of experience as an environmental consultant on energy, greenhouse gas, and water resource issues for nonprofit organizations, government agencies, and private businesses. He has developed and applied computer models; provided training and expert testimony on issues related to environmental laws, policies, and permits; and led multi-disciplinary research teams. ACKNOWLEDGEMENTS The authors greatly appreciate the expertise and data shared by the following reviewers: David Carrier of the Appalachian Regional Commission, Fred Freme at the Energy Information Administration within the United States Department of Energy, and Melissa Fry Konty of the Mountain Association for Community Economic Development. Their questions, comments, ideas, and suggestions resulted in a significant improvement of the report. We would also like to thank Jason Bailey of Mountain Association for Community Economic Development, Bill Becker of the University of Colorado and the Central Appalachian Prosperity Project, Randy Childs of The Bureau of Business and Economic Research at West Virginia University, Mark Gray of American Electric Power, Richard Heinberg of the Post Carbon Institute, Sue Jones of Community Energy Partners, Mike Mellish at the Energy Information Administration, Cindy Rank of the West Virginia Highlands Conservancy, and Ken Ward of the Charleston Gazette. Each of these individuals either provided encouragement for undertaking the research project or useful input into specific topics addressed in the report. Thank you all for your contribution. COVER PHOTOS From left to right: Hufford, Mary, Landscape and History at the Headwaters of the Big Coal River Valley: An Overview; Eiler, Lyntha, “Aerial view of Catenary Coal’s Samples Mine, a Mountaintop Removal project at the head of Cabin Creek,” and “Aerial view of empty coal barges, en route to Marmet on the Kanawha River,” Tending the Commons: Folklife and Landscape in Southern West Virginia. American Folklife Center, Library of Congress; National Renewable Energy Laboratory (NREL). ii TABLE OF CONTENTS EXECUTIVE SUMMARY ....................................................................................................................................... 1 1. INTRODUCTION ......................................................................................................................................... 5 2. THE DECLINING COMPETITIVENESS OF CENTRAL APPALACHIAN COAL FOR ELECTRICITY GENERATION ........ 10 2.1 RISING COST FOR CENTRAL APPALACHIAN COAL AND ELECTRICITY GENERATION ........................................................... 11 2.2 COMPETITION WITH POWDER RIVER BASIN AND NORTHERN APPALACHIAN COAL ........................................................ 13 2.3 COMPETITION FROM NATURAL GAS ..................................................................................................................... 16 2.4 COMPETITION FROM RENEWABLE ENERGY ............................................................................................................ 19 3. DEPLETION OF THE MOST PRODUCTIVE COAL RESERVES ........................................................................... 20 4. FUTURE REGULATORY CHALLENGES ......................................................................................................... 25 4.1 REGULATION OF CARBON DIOXIDE EMISSIONS........................................................................................................ 25 4.2 REGULATION OF POLLUTANTS RELATED TO COAL-FIRED POWER GENERATION .............................................................. 28 4.3 RESTRICTIONS ON MOUNTAINTOP REMOVAL MINING .............................................................................................. 29 4.3.1 Pending legislation and regulation ......................................................................................................... 29 4.3.2 The potential impact of limitations on mountaintop removal mining ................................................... 30 5. CONCLUSIONS AND IMPLICATIONS ........................................................................................................... 33 REFERENCES ..................................................................................................................................................... 35 TABLE OF FIGURES Figure 1: Central Appalachian states and counties ......................................................................................................... 5 Figure 2: Historical and projected coal production for Northern and Central Appalachia, by mine type, 1983-2035 ... 6 Figure 3: Shift from high-sulfur to low-sulfur coal as a percent of US coal production .................................................. 7 Figure 4: Central Appalachian underground and surface coal production, 1983-2008 .................................................. 8 Figure 5: Central Appalachia mine mouth coal prices and labor productivity, 1983-2008 ........................................... 11 Figure 6: Average delivered price of coal burned at Central Appalachian power plants, 1990-2007 .......................... 12 Figure 7: Domestic distribution of coal to electricity generating utilities in select states, for select years .................. 13 Figure 8: Comparison of coal prices for the Powder River Basin, Northern Appalachia, and Central Appalachia ....... 15 Figure 9: Imports of coal to electricity-generating utilities in Pennsylvania and Ohio, for select years ....................... 16 Figure 10: Total net electricity generation from coal and natural gas in the US, 2003-2008 ....................................... 17 Figure 11: Electricity generation by fuel source for utilities in ten-state region, 1994-2007 ....................................... 18 Figure 12: Electricity generation by fuel source for utilities in ten-state region, August 2008-2009 ........................... 18 Figure 13: Total production, labor productivity, and price for Central Appalachian coal mining, 1983-2008 ............. 20 Figure 14: Central Appalachia coal employment and the expansion of surface mining, 1983-2008............................ 22 Figure 15: Central Appalachia coal labor productivity in tons per miner, 1983-2008 .................................................. 23 Figure 16: Required carbon dioxide reductions for electricity generation in the ten-state region .............................. 27 TABLE OF TABLES Table 1: Renewable energy generation at Appalachian utilities, for select years ........................................................ 19 Table 2: Carbon dioxide emissions in the United States, 1990-2007 ............................................................................ 26 Table 3: Electricity sector carbon dioxide emissions in Appalachia and the South Atlantic, 2005 ............................... 26 iii ABBREVIATIONS ACES American Clean Energy and Security (Act) AEP American Electric Power ARRA American Recovery and Reinvestment Act CAA Clean Air Act CAIR Clean Air Interstate Rule CCS carbon capture and sequestration CO2 carbon dioxide CWA Clean Water Act DRB demonstrated reserve base EIA Energy Information Administration EIS environmental impact statement EKPC East Kentucky Power Cooperative ERR estimated recoverable reserves FGD flue-gas desulfurization GW gigawatt HR House Resolution KCA Kentucky Coal Association KOEP Kentucky Office of Energy Policy MACED Mountain Association for Community Economic Development met coal metallurgical coal mmBtu million British thermal units MMT million metric tons MOU memorandum of understanding MSHA Mine Safety and Health Administration MTR mountaintop removal MW megawatt NETL National Energy Technology Laboratory NMA National Mining Association NOx nitrogen oxide PRB Powder River Basin RTC Resource Technologies Corporation S Senate (bill) SO2 sulfur dioxide tpm tons per miner tpmh tons per miner-hour US United States USEPA United States Environmental Protection Agency USGS United States Geological Survey WVSTO West Virginia State Treasurer’s Office WVU West Virginia University SUGGESTED REFERENCE McIlmoil Rory and Evan Hansen (2010) The decline of Central Appalachian coal and the need for economic diversification. Thinking Downstream: White Paper #1. Morgantown, West Virginia: Downstream Strategies. January 19. iv EXECUTIVE SUMMARY Coal mining has played an important role in local economic development in Central Appalachia, primarily due to the jobs and taxes that the industry has provided. In 2008, for instance, the coal industry employed 37,000 workers directly and indirectly across the region, accounting for 1% to 40% of the labor force in individual counties. Additionally, the coal severance tax generates hundreds of millions of dollars in state