Bad news for coal, really bad news for eastern coal

Posted by Fred Frailey
on Friday, March 18, 2011

This week, the Environmental Protection Agency proposed new rules for limiting emissions of mercury and other toxic metals and acid gases from coal-fired power plants. Any way you look at it, it’s a disaster for eastern coal producers and the railroads that haul the coal to generating stations. However, the rules will probably have a less severe but still noticeable impact on coal mined in the Powder River Basin fields of Wyoming and Montana.


The rules arise from a determination by EPA 11 years ago that mercury emissions be curtailed. Exposure to high levels of mercury can damage the central nervous system, affect the cardiovascular system, and become a factor in heart disease. In 2008, after EPA had not acted upon that ruling, environmental groups sued the agency, and in a 2009 settlement, EPA agreed to issue the cleanup rules that were made public this week and will be finalized later this year, to take effect by late 2014.
 
To assess the impact of these rules, I went to Hugh Wynne, senior utilities analyst for the white-glove Wall Street research firm of Sanford C. Bernstein & Co. Wynne has done pioneering work on this subject. He says the mercury rules will cause utilities to close their older, smaller, and less-efficient power plants because the cost of making them compliant would be prohibitive. Some of the lost output will be made up by the relatively few new coal-powered plants coming on line. But the real winner will be dirt-cheap natural gas, which will gain market share from coal. And the real losers will be railroads.
 
How this works out will depend upon the technology used to rid emissions of mercury. The gold standard is flue gas desulfurization equipment, commonly called scrubbers, which also happen to be extremely expensive. What the Clean Air Act requires in this instance is that all sources of mercury contamination from power plants achieve reductions equal to that of the most effective 12 percent of existing sources. With relatively dirty eastern coal, nothing short of scrubbers will suffice.
 
How would this affect railroads? Wynne’s research suggests that if the more strenuous scrubbers are necessary in every instance, that closures of coal-fired power plants will result by 2015 in 76 million fewer tons a year of coal being produced in the eastern half of the U.S. This equates to 22 percent of the coal originated on CSX and Norfolk Southern in 2010. To put that another way, it’s almost one-third of the coal they hauled to utilities last year. In the West, Wynne says scrubbers could mean 50 million tons of coal shipments per year would be lost, or an estimated 11 percent of the volume originated in 2010 by BNSF Railway and Union Pacific.
 
On the other hand, Wynne reports, research has suggested that a less expensive method of mercury abatement involving a combination of dry sorbent injections, fabric filters, and activated carbon would permit Powder River Basin coal to meet the mercury standard. Should this prove feasible, he says, the loss of sales in PRB would amount to about 31 million instead of 50 million tons, an estimated 7 percent traffic loss.
 
This may be good news for your health and mine, but it bodes no good for railroads, particularly in the East. However, there may be a silver lining. Wynne reports that some eastern utilities are evaluating a compliance strategy of switching from Appalachian to Power River Basin coal to take advantage of the possible lower cost of extracting mercury. To the extent that this happens, the traffic loss resulting from the EPA mercury rule will be mitigated mitigated for railroads both east and west. True, this might mean an even steeper drop in eastern coal production, but it takes somewhat more low-btu PRB coal to make replace eastern coal bearing the same energy potential. — Fred W. Frailey

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