Virginia continues to be a top coal producer, but new rules and renewables challenge the industry’s futureApril 27, 2012 6:00 AM
by Garry Kranz
Coal mining took off in Virginia when the railroads arrived in the 1880s. More than 130 years later, coal still fuels Virginia’s economy. Northern Virginia’s tech sector depends on a steady supply of low-cost electricity, much of it derived from bitumen-rich Appalachian coal.
And Virginia’s deepwater port in Hampton Roads — the largest coal exporting terminal in the U.S. — is a huge economic asset that neighboring coal states can only envy.
Coal mining is one of Virginia’s oldest continuously operating industries, but the biggest question facing coal companies now is this: how does it adapt to the future? Just like the commodity they coax from the earth, Virginia’s coal companies and their national counterparts are under intense pressure. Coal has fallen into disfavor amid fears that it contributes to carbon pollution and global warming, prompting new environmental regulations.
In late March, the Environmental Protection Agency (EPA) announced the first-ever limits on carbon dioxide emissions for new coal power plants. Under the New Source Performance Standard, emissions could not exceed 1,000 pounds of carbon dioxide per megawatt hour of electricity produced. That benchmark, say some industry observers, is impossible to attain without costly equipment to capture carbon emissions.
The regulations face certain opposition in Congress as well as legal challenges. Still, they’re indicative of the enormous challenges facing the industry — challenges that could have an impact on a new $6 billion coal-power plant proposed for Surry County. It will delay, if not altogether doom, plans by Old Dominion Electric Cooperative (ODEC) in Glen Allen. ODEC already has received zoning permits to build a 1,200- to 1,500-megawatt coal plant in Dendron, and it owns another potential site in Sussex County. The proposed Cypress Creek Power Station would supply electricity for 330,000 to 375,000 homes, depending on its eventual location.
The plant is needed to keep pace with new demand for electricity, forecast to increase about 3 percent a year, says David Hudgins, ODEC’s director of member and external relations. “We need the base-load energy, and we need it to be as fuel-efficient as possible,” he says. It’s unlikely the plant will be built before 2021-22, he adds, but the company has spent about $25 million so far on land acquisitions, site work and preliminary testing. The new spate of environmental regs puts the plant’s future in doubt, though. “The reality is we’re waiting for clarification of multiple new EPA rules. We can’t spend big money on a new plant unless we know what the standard is going to be,” Hudgins says.
For now and the near future, experts say coal-fired electricity will contribute significantly to Virginia’s energy supply, to say nothing of America in general. That’s because it’s cheap and abundant, even in the face of plummeting prices for natural gas. “The United States has about 250 billion to 300 billion tons of recoverable coal reserves. We are to coal what Saudi Arabia is to oil,” says Nino Ripepi, a Virginia Tech professor with the Virginia Center for Coal and Energy Research.
About 1 billion tons of coal gets extracted annually in the U.S. Even in Virginia — where production is in the midst of a two-decade decline — Ripepi says coal accounts for about 40 percent of all in-state generation of electric power, a figure not expected to change quickly in coming years. Virginia imports about one-third of its electricity, second only to California. If coal use is discouraged, Virginia probably will be forced to import even more electric power, increasing energy costs, Repipi says.
Not surprisingly, big changes are afoot in Virginia’s coal industry. Despite howls of protest from environmentalists and citizens groups, Dominion Virginia Power, the state’s largest regulated electric utility, is set to open a $1.8 billion “clean-coal” plant in the Southwest Virginia hamlet of St. Paul this summer.
Consolidation also is reshaping the state’s coal sector. Bristol-based Alpha Natural Resources last year became the second-largest U.S. coal company, in terms of revenue — and the third largest in production — after it bought Massey Energy Co., a longtime Virginia rival. The deal swelled Alpha’s revenue to $7.1 billion in 2011, second only to St. Louis-based Peabody Energy Inc.
Changes in Virginia are emblematic of the flux within the coal industry in general. A relatively mild winter cut into demand in 2011 and drove domestic coal prices lower than normal. Good news for consumers — not so much for coal companies. In mid-April, stock prices for Alpha Natural Resources had dropped by 75 percent and were down 80 percent at James River Coal Co. over the past year.
Coal prices are being depressed even further by a sudden surplus of natural gas, including newly unearthed shale deposits in Pennsylvania, North Dakota, Wyoming and other states. In addition, the fast-growing economies of Brazil, China and India, among others, are fueling a sustained building boom, supported by imports of high-quality U.S. metallurgical coal, used in the making of steel.
In Virginia, the macroeconomic challenges are magnified by bad geological luck. Although it is consistently a top 10 producer, Virginia is running out of available, easily accessible coal seams. Virginia producers extracted 22.4 million tons of coal in 2011, according to the federal Energy Information Administration. That’s less than half of Virginia’s all-time high of 46.6 million tons in 1990. During the same time frame, lower-cost surface mines in western states have doubled their output, siphoning off business from Appalachian states like Virginia, where most mining occurs underground.
“Our coal seams are thinner and deeper than our sister coal states. That makes it tougher and more expensive for us to recover mineable coal,” says W. Thomas Hudson, president of the Virginia Coal Association Inc., a trade group in Richmond.
Unfriendly environment for coal
But the biggest worry is an uncertain regulatory climate, says Brooks Smith, an attorney with Hunton & Williams in Richmond who represents several of the nation’s largest coal companies, including Alpha Natural Resources. Mining permits have slowed to a trickle as the EPA implements tougher restrictions on mining, Smith says.
“We believe the EPA is trying to turn this situation on its head and upset the process,” he says, referring to recent attempts by the agency to modify how permits are issued under the federal Clean Water Act.
The debate mostly centers on a 2008 study in which EPA scientists concluded that entire orders of aquatic insects were being wiped out downstream of mountaintop-removal mining operations in Central Appalachia, which encompasses Kentucky, Virginia and West Virginia. The 20-page report, “Downstream Effects of Mountaintop Mining,” prompted the EPA to impose stricter rules designed to protect streams and waterways. Critics say the new limits are based on assumptions, not science.
“It’s an attempt by the EPA to establish a water-quality standard that no mining company can meet,” says Gene Kitts, senior vice president of environmental affairs for Alpha, who is based in Charleston, W.Va.
Not even a court decision has resolved the issue. The National Mining Association, a trade group in Washington, D.C., sued the EPA over the matter. The first phase of the litigation alleged that EPA unlawfully obstructed Clean Water Act permits, thus creating an unofficial moratorium on coal mining in the Central Appalachian region. Late last year, U.S. District Court Judge Reggie Walton sided with the industry, ruling the EPA had overstepped its authority and failed to follow established guidelines for federal rulemaking.
The matter finally may be resolved in June, Smith says. That’s when a motion of summary judgment is scheduled to be heard on the so-called “guidance” phase of the lawsuit. As the complex process gets sorted out, about 200 water-discharge permits for coal mining projects in Virginia are in abeyance, Smith says.
Hudson says it’s a double whammy on the coal industry: delaying the opening of new mines, while older mines can’t get renewals of their five-year operating permits. Virginia’s mining sector already is feeling the impact. In February, Hudson says, A&G Coal Corp. in Wise County laid off 108 miners because of a slowdown in mining.
Then in March Pennsylvania-based Consol Inc. announced it was idling production of metallurgical coal at its long-wall mine in Buchanan County, which employs about 700 people. Hudson says Consol hasn’t announced layoffs, instead shifting employees to non-mining duties, “but how long will it be before that work runs out?”
Power outage ahead?
The coal industry faces another hit, at least indirectly, from regulations aimed at U.S. power companies. ICF International Inc., a Fairfax-based consulting firm, forecasts that America could lose up to 20 percent of its coal-fired electric generation during this decade. The main impetus: four newly proposed rules by the EPA that could force utilities to either shut down older coal plants or make expensive upgrades. The report was prepared before EPA announced its new caps in March on carbon emissions for new coal-fired plants.
“It’s going to require flexibility, careful planning and lots of discussion by all players in the industry to make sure the power grid continues to operate as these coal plants get decommissioned,” says John Blaney, a senior vice president with ICF International.
Roanoke-based Appalachian Power Co. plans to shutter its two Virginia coal-fired generating plants by 2015 to comply with the Mercury and Air Toxics Standards Rule and the Cross-State Air Pollution Rule, company spokesman Todd Burns says.
The company, a subsidiary of Columbus, Ohio-based American Electric Power, or AEP, serves about 500,000 customers in western Virginia. The closures in Virginia include a 335-megawatt coal unit in Giles County and a 235-megawatt coal station in Russell County. Two other Russell County coal plants will be converted to burn natural gas. The shift is expected to result in the loss of 85 jobs in Virginia, Burns says.
It is part of a larger effort by AEP to retire nearly 6,000 megawatts of coal generation in nine states. Appalachian Power customers could see their monthly electric bills jump 10 percent to 15 percent as a result, Burns says.
Likewise Dominion has announced plans to retire several coal-fired units at its Chesapeake Energy Center in Chesapeake and Yorktown Power Station by 2016. The units total about 360 megawatts. Output from a proposed $1 billion, 1,300-megawatt, natural gas-fired plant in Brunswick County would replace electricity from those coal units and help Dominion meet growing demand while also satisfying the latest federal clean-air standards. The company also plans to retire the 74-megawatt North Branch Power Station in late 2014 when a new 1,300-megawatt, natural gas Warren County Power Station is complete.
Coal plants and controversies
While U.S. energy producers wrestle with these potential impacts, Dominion is testing the boilers at its soon-to-be-opened Virginia City Hybrid Energy Center in Wise County — one of seven Southwest counties that account for nearly all the coal mined in Virginia. Situated on an reclaimed strip mine, Dominion’s unit will burn a blend of freshly mined coal, waste coal and biomass to produce up to 585 megawatts, or enough electricity for about 146,000 homes, say company officials.
It will use a technology known as circulating fluidized bed, a process for burning “clean coal” that has been approved by the U.S. Department of Energy’s Office of Fossil Energy. “This type of boiler enables us to burn a very broad range of coal, and it’s designed for very low heating values,” says Diane Leopold, senior vice president of Dominion’s transmission business. The hybrid plant will consume about 2.8 million tons of coal annually, most of it mined in and around Wise and adjacent counties, Leopold says. Under the air permit issued to Dominion by the SCC, biomass — wood chips, in layman’s terms — must comprise 5 percent of the fuel mix at the facility by its third year of operation, increasing 1 percent a year to a minimum of 10 percent and a maximum of 20 percent.
The plant is a giant stride forward in the use of clean coal, Dominion spokesman James Norvelle says. Because of its fuels mix and strict permitting limits, he says, the plant will emit fewer toxins and use less water.
Environmentalists thus far are not impressed. “The biomass component is negligible compared to the amount of coal that will be burned, resulting in mountains being destroyed by mountaintop removal and the release of mercury and smog-inducing pollutants,” says Glen Besa, president of the Virginia chapter of the Sierra Club.
While controversial, coal is an economic linchpin for the seven counties that comprise the Virginia Coalfields — a region where high-wage jobs are in short supply.
Mechanization has increased mine production and reduced employment in recent decades. Even so, the region’s coal industry pays an average yearly wage of nearly $85,000, according to a recent report by Chmura Economics and Analytics, a Richmond-based econometrics firm. That’s more than double the $37,757 average for all industries in the region. The report, prepared on behalf of the Virginia Coal Association, says nearly 12 percent of local tax revenue in the region stems from coal.
Coal’s impact is not confined to the coalfields, however. “Virginia gets the double benefit from coal because of the Port of Virginia,” says Paul Grossman, director of international trade and investment at the Virginia Economic Development Partnership.
State coal exports shot up 30 percent year over year in 2011, generating nearly $1.3 billion in revenue. Grossman traces the spectacular one-year leap to growing worldwide coal consumption, notably for Virginia’s high-quality metallurgical coal. Global supplies are constrained as Australia, the world’s largest coal exporter, recovers from flooding that disrupted its mining industry two years ago.
All told, 40.9 million short tons (a short ton is equivalent to 2,000 pounds) of coal were shipped through harbors in Hampton Roads, most of it coking coal bound for emerging economies. China, the Netherlands, Spain and Sweden all imported dramatically higher quantities of Virginia coal. Exports to Japan — Virginia’s 18th-largest import customer — were up an eye-popping 2,406 percent as the island nation used coal to replenish base load electric power lost when nuclear reactors were damaged by a tsunami on March 11, 2011.
Railway giant Norfolk Southern Corp. steamed to record revenues of $11.2 billion in 2011, with increased coal shipments accounting for nearly one-third of the revenue growth, according to the company’s annual financial statement.
Prices for metallurgical coal tend to far outstrip prices for thermal coal (used in making electricity), thus making it more profitable to recover and process. After acquiring Massey Energy last June, Alpha has become the new heavyweight in metallurgical coal, with total reserves of 1.4 billion tons. “That’s a lot of high-quality metallurgical coal in the ground that we can develop over time,” Alpha spokesman Ted Pile says.
Despite access to Massey’s metallurgical coal, there was a downside to the deal: one of the worst safety records in the industry. Alpha paid a record fine of $209.3 million last year to settle ongoing criminal and civil suits related to a massive explosion at a Massey mine. Twenty-nine miners died at Upper Big Branch in West Virginia on April 5, 2010. To improve worker safety, Alpha enrolled all 7,000 former Massey employees in its safety-training program, called “Running Right.”
For the foreseeable future, Virginia is poised to remain a top-ranked coal producer. “And we have some of the highest quality coal in the world,” says Ripepi of Virginia Tech. Still, America is marching to a drumbeat for cleaner, renewable energy. To adapt, Virginia’s coal companies, like the industry at large, will have to dig in and dig deep.