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AEO2014: what future for US coal production?

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World Coal,

The US Energy Information Administration (EIA) has released the full Annual Energy Outlook 2014 (AEO2014) – its yearly look at trends in the US energy market through to 2040. It includes a range of different futures for US coal production from outright disaster (in the case of an economy-wide carbon price) to the decidedly positive (in cases of high gas prices).

Reference case: slow increase

In its reference case, coal production rises at an average of 0.3%/year from 1.016 billion short t (20.6 quadrillion Btu) in 2012 to 1.121 billion short t (22.6 quadrillion Btu) in 2040. Over that time period, coal production recovers briefly to 2015, as natural gas prices rise, but then drops back to 2012 levels in 2016 as utilities comply with Mercury and Air Toxic Standards (MATS) and retire coal-fired power plants. From 2016 – 2030, coal production grows gradually on growing electricity demand and rising natural gas prices spur the use of coal for power generation. Following that, when existing coal units reach maximum utilization rates and virtually no new capacity is built, coal production stabilises.

Within the overall trends, there is much regional variation with the Interior Region – which includes the Illinois Coal Basin – seeing strong production growth, as scrubbers installed at existing coal-fired power plants allow them to burn the region’s higher-sulfur coals with lower delivered costs. Elsewhere, production in the West Region – which includes the Powder River Basin – increases only slightly in the Reference Case, while Appalachian coal production drops by 14% from 2012 – 2016 as coal from the extensively mined and higher-cost reserves are replaced by lower-cost coal from other regions.

Beyond the Reference Case, AEO2014 includes a number of cases that impact US coal production and demonstrates the uncertainty facing the US coal industry.

Alternative case no. 1: high-cost coal and low-cost gas

In general – and as would be expected – cases that assume a reduced competitiveness for coal versus natural see lower coal use. This occurs in the High Coal Cost Case, which assumes higher mining and transportation costs for coal and sees coal production 7% lower than the Reference Case in 2020 and 25% lower in 2040, as well as the High Oil and Gas Resource Case, which sees the cost of natural gas production decline

Alternative case no. 2: carbon pricing

Similarly, actions to cut greenhouse gas emissions would reduce the use of coal because of its high carbon content. The GHG10 Case includes an economy-wide CO2 price that rises to US$34/t in 2040, leading to a 32% drop in coal production compared to the Reference Case. In addition, two more GHG scenarios were developed: the GHG25 Case, with an economy-wide CO2 allowance fee that increases to US$85/t in 2040; and the GHG10 + Low Gas Prices Case, with lower natural gas prices than in the Reference Case. In the GHG25 case and the GHG10 and Low Gas Prices case, total coal production in 2040 is 73% and 53% lower, respectively, than in the Reference Case.

Alternative case no. 3: low-cost coal and high-cost gas

On the other hand, a Low Coal Cost Case or Low Oil and Gas Resource Case improve the competitiveness of coal and lead to higher levels of coal production: for example, in the Low Coal Cost Case, coal production is 4% higher than the Reference Case in 2020 and 11% higher in 2040.

Conclusion: the decline and fall of the US coal industry?

There is not too much for the US coal industry to get excited about in AEO2014. In general, it supports the idea that coal is in secular decline as an energy source – but that decline will be a gradual process. Only in the most dramatic cases of environmental regulation does coal-fired power fall off a cliff – but these scenarios would require concerted political action from Congress (e.g. to introduce a carbon price) and that seems unlikely any time soon.

Regionally, it is a different story: Appalachia has been the hardest hit in recent years by the decline of coal’s share in the energy mix; it will continue to be so in all cases in the AEO2014. The high-cost of coal extraction here simply do not make the economics work. This most historic of coal mining regions will need to adjust to life after coal sooner than most. 

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