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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Biden Can’t Save U.S. Coal, But He Can Help The Miners

Margaret Thatcher hated the UK’s coal miners and especially their union. A series of brutal strikes divided the nation during her regime. But when the time came to deal with an overly expensive coal industry, she did not just lower the boom and walk away. She forced government owned electric companies to sign multiyear contracts to purchase coal. That gave coal mines an opportunity to improve productivity before contracts ended, and perhaps become competitive enough to save their businesses. And while they did become more efficient, natural gas suppliers became even more efficient than before, so coal could still not compete against gas. And so, despite their former clout, the UK’s coal mines closed and a once vital industry became all but extinct. Now Poland faces a similar problem. Regions of the country depend heavily on well paying, unionized coal jobs. A large, new coal-fired power plant could not get financing as banks and other lenders have reduced commitments to environmentally dubious projects. The government, eager at least to placate miners, announced plans to build a coal storage facility. Keep mining coal that isn’t immediately needed and put it in storage. This is the sort of strategy we might have expected the former communist regime to employ in order to meet arbitrary production targets. But ultimately the problem for Poland’s politicians isn’t about coal, the environment or electricity production. The problem is simple. Some regions of the country would collapse economically without coal mining and the associated power generation industry jobs.  

That brings us to U.S. coal usage in electricity production, its principal use apart from steel production, which continues to decline. Vigorous support from the Trump administration has failed to offset coal’s deteriorating economics versus natural gas and renewables.

Related: The Permian Could See Record Gas Production In 2021

Electricity is a commodity. Most commodities like wheat or cotton, for example, are not directly consumed themselves but serve as inputs or raw materials of production. Think about a term where the adjective “boutique” or bespoke would be inappropriate (boutique lead ingots for example is simply silly). And if product differentiation is difficult if not impossible the same is true for price differentiation. In commodity businesses the low-cost producer dominates. Coal-fired electricity in the US now costs more than alternative modes of production even before pricing in environmental externalities. As a result, coal mining is in a precipitous decline.

The interesting thing for us is the contrast between the two conservative leaders, Thatcher and Trump. The latter’s staunch embrace of the coal miners and the mining industry as opposed to Prime Minister Thatcher’s more “muscular” approach. But despite the differences in policy, both leaders permitted an increasingly uneconomic industry to decline.

We were expecting similar benign neglect of the coal industry from the likely Democratic presidential candidate Biden. Perhaps vague campaign promises regarding “clean” or improving coal technologies to appeal to coal-state voters. But nothing of any real energy policy substance. It appears we were wrong. Related: Why Energy Demand Is Plummeting In The U.S.

The Biden camp seems ready to let competitive forces in the U.S. energy markets drive coal to extinction. As a result, their focus is on utilizing federal resources to assist/retrain miners and affected communities rather than subsidizing the mines and the industry in general. The Democratic party platform is effectively saying we need an alternative to coal so let’s minimize the social harm. Why? Because the U.S. still employs roughly 50,000 coal miners earning wages and benefits of $4 billion and many of these miners work in regions that offer few alternatives to mining. 

One feature surprisingly absent from the Democrat’s environmental platform was a carbon tax. This would hasten the demise of coal as a boiler fuel in the U.S. rendering it even more economically uncompetitive. But interestingly, the higher the carbon tax the more attractive base load nuclear power becomes. Nuclear power seems to be a permanent recipient of modern day industrial welfare. So for this reason alone, we would not completely rule out a carbon tax.

Admittedly, political platforms do not always turn into policy actions after the election. but the Biden energy plank, as we read it, seems more favorable to coal miners (the people) than to coal mines (the corporations). 

By Leonard Hyman and William Tilles

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