EIA’s False Coal Economy

June 20, 2012

Any day this month the Energy Information Administration (EIA) is supposed to release itsAnnual Energy Outlook(AEO), one of the most widely referenced predictions of the energy market - and one that is infamously unreliable. Worse, EIA's Energy Outlook is consistently slanted to encourage the kind of risky bets that have left some utilities like Duke Energy heavilyreliant on coal- and their customers bearing the rising costs. Will the final 2012 Outlook be any different, or will EIA re-confirm its role as purveyor of themyth of unlimited, cheap coal? Compared with industry forecasts about coal demand, and 2009 analysis from theUS Geological Survey(USGS) about coal supply and price, EIA's projections in 2011 seemed to use factors divorced of economics and physics. EIA grossly overestimated how much coal will be mined and the amount of coal that will be burned in America, and terribly underestimated the cost everyone will pay. Coal combustion is in steep decline in the US - today, coal accounts for just34%of US electricity generation, down from57%in 1985. And this trend will continue: numerous industry analyses project that20%or more of coal plants will be shut down in the next 8 years. Since 2010 the coal industry has announced it will shutdown 13% of plants in terms generation capacity, or 18% of the existingutility-scale plants. This is all happening without any expectation of Congress producing climate change legislation. EIA released its abridged 2012 AEO earlier this year, which showed coal consumption increasing steadily through 2035. This happens despite an increase in the mine-mouth price of coal, which does not per the AEO translate into higher electricity costs from coal-fired plants. But EIA pointed out that some its numbers could change for the full release, and EIA'snew administrator, Adam Sieminski, may have reflected onquestions from Senatorsabout the reliability of AEO data particularly since his previous employer, DeutscheBank, also forecasts significant coal plant closures. TheDeutscheBank reportin 2010 was an energy plan for policymakers in light of their projections of at least 60 GW of retired coal plants. Certainly any forecast encourages what it forecasts, which Sieminski should understand as he oversees what EIA is about to encourage. Though EIA has somewhat failed even at self-fulfilling prophecy. For decades, EIA officials have failed to integrate new data on coal reserves from USGS (See this Wall Street Journals front page article from 2009:U.S. Foresees a Thinner Cushion of Coal). The new analyses from USGS and the numbers used by EIA are in painful disagreement. Without any notable increase in price, EIA projections in the 2011 AEO were higher than what USGS reported is economically possible to mine - by over 400% for Northern Appalachia, 250% for Central Appalachia, 200% for the Illinois Basin, and 300% for the Southwest. EIA chronically underestimates coal price. EIA between 1999 and 2011 predicted Central Appalachia coal price would always fall or remain virtually stagnant, during which time the price went up over 100%. Even though prices were higher, production during that time fell significantly. Companies like Alpha Natural Resources, and other coal suppliers of Duke Energy, in Central Appalachia haveobliterated over 500 mountains. Using EIA numbers predicting that coal will be cheap and available, companies like Duke Energyhave asked ratepayersto accept a higher prices, and willkeep asking, for electricity so Duke can spend billions to renovate old coal plants or build new ones. In this way, Duke is trying to lock in demand for coal regardless of the rising price, which ratepayers will have to cover. North Carolinians get ripped off by Duke, AND get more pollution, Duke invests a relative pittance in renewable energy, and CEOJim Rogersgets a multi-million dollar salary. There is only one major coal basin where 2011 EIA projections did not conflict with USGS, but that's in part because the AEO only goes to 2035. Although the Powder River Basin (PRB) may have the highest reserves in the country, USGS calculates that only 6% of this coal can be mined economically. Of course, EIA estimates several times that amount. Meanwhile, the Bureau of Land Managementflawed coal leasing programis providing taxpayer-owned coal for absurdly low prices - the last auctionfetchedjust $1.11 per ton - while coal pushers can sell it abroad for as much as $100. As domestic and foreign mining companies - like Peabody,Cloud Peak(offshoot of Rio Tinto), Arch Coal, andAmbre Energy areplanning to exportannually about 30% of what EIA says will be mined from the PRB. This may ruffle feathers of utilities, who look to the PRB for over40% of coal burnedin the country. Congressman Ed Markey (D-MA), Chair of the Natural Resources Committee, hascalledfor a GAO review of the BLMs coal leasing practices. When it comes to demand, supply, and price of coal, the ubiquitous reference to EIA numbers is an obstacle to economic investments in a modern energy system. A modern grid will run on non-polluting permanent energy sources without the incessant upstream costs from mining. Coal has always been expensive, but the majority of the cost of burning and mining coal has beensocializedin every way imaginable through tax subsidies to industry; public healthcare costs caused by pollution from smokestacks; lost days of work and school; cleanup costs of billions of tons of coal ash and acid mine drainage; not to mention the unmeasured destruction ofAppalachia, one of the most biodiverse regions of the United States. If EIAs2012 Annual Energy Outlook predicts implausibly cheap coal prices together with aberrantly high rates of production and domestic demand, these predictions will be less than worthless. While assuring to know EIA predictions are wrong, EIAshould stop encouraging the dirty regression to a coal economy.

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