Only a few short years ago the U.S. coal industry enjoyed a mini-renaissance with several new large power plants brought on line in 2010 and 2011, which at the time firmly entrenched coal as the dominant source of electric generation in the U.S. Since then, coal’s share of the electric market has contracted sharply, and against the backdrop of the White House’s new position on climate change is why many see an industry in serious trouble.

The U.S. coal industry has been left to fight an uphill battle with the EPA over the agency’s authority to set rules on CO2 emissions from power plants. The coal industry is fighting this battle virtually alone, as traditional fossil fuel allies sit on the sidelines (oil) with no direct stake, or wait eagerly to absorb market share (natural gas). In parallel to this new policy reality, technology developments – from advances in unconventional gas extraction to startling declines in the cost of renewable energy generation and efficiency – are redefining the economics of electricity markets.

This confluence of technology and policy has put in motion a permanent, if slow, decline in the role that coal will play in America’s energy mix; and it is worth noting that the coming decline in use would look much steeper had it not been for the meltdown at Fukushima Daiichi and how that has severely limited development and expansion of nuclear power in the U.S.

Three Lessons  

1)   The industry mistakenly viewed climate change as an outgrowth of environmental activism. The coal industry has for decades successfully managed challenges by environmental groups. The leading edge of climate change action was driven by traditional environmentalist groups, and the industry’s strategy was generally to aggressively deny and attack the message rather than looking for compromise. Traditional environmental challenges are local – climate change is a global issue and one that can increasingly be quantified economically. Viewed as an economic challenge the industry could have looked for ways to collaborate and compromise to reach the best economic result. Combined with dwindling political clout the industry was ultimately left out of the policymaking process.

2)   The speed of cost declines for new technologies has caught nearly everyone by surprise, new unconventional gas extraction techniques, the drop in the price of renewable energy, and improving energy efficiency technologies have led to increasing confidence by power companies, utilities, and consumers that commercially viable alternatives can fill future electricity needs. It had been decades since the market-changing technical evolution in the power sector – even a modest influx of research dollars should have been a concern. The significant and accelerating investment over the past fifteen years in new energy technology, even where breakthroughs seemed remote, should have sounded very serious warnings about vulnerability to new commercially viable alternatives.

3)   The industry failed to commit to next generation technologies. Rather than recognizing the shifting policy landscape and technologic revolution as potentially existential threats and focusing on investing in next generation technologies, the industry used the promise of carbon capture as a lobbying tool for why coal would be relevant even if a CO2-constrained world were to ever occur. The Department of Energy has invested more in advanced coal technologies over the past decade than the coal industry. Today there are a number of projects, gasification and liquefaction designed, to capture substantial amounts of CO2, as well as advanced uses for CO2 in development – and even now in the face of the bleak future for coal-fired electric generation, these projects are being driven by private developers and investors, not the nation’s coal producers.

After decades of dominance in an industrial and regulatory landscape that has historically moved slowly it is certainly foreseeable that the industry had difficulty appreciating the threat of sudden and significant change. With information and technology evolving on an accelerating curve it would be wise for other established energy businesses to ensure a premium is placed on vision, flexibility and strategy.

Elias Hinckley is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester where he helps his clients solve the challenges of a changing energy landscape by using his understanding of energy policy, regulation, and markets to quickly and creatively assemble successful energy deals.

Republished with permission from Energy Trends Insider