Greetings:

The gloomy headlines about sinking oil prices never seem to end. But crude oil isn't the only fossil fuel caught up in a bear market these days. Coal prices have also been sinking. And the long-term outlook for coal arguably looks a lot worse than that of oil.

More Financial Pain in Coal Country

Monday brought the latest news of a U.S. coal mining company filing for bankruptcy protection: Arch Coal, a longtime giant of the industry. Arch is looking to follow the path recently taken by other coal producers, such as Walter Energy and Alpha Natural Resources, all of whom have been hurt by the roughly 50% drop in U.S. thermal coal prices that began in 2011.

The reason for the industry's downturn is simple: Falling demand. Long the mainstay of the U.S. electric grid, coal has seen its dominance upended by a combination of tough new federal regulations on air quality and carbon dioxide emissions as well as fierce competition from cheap and abundant natural gas. Up until the Great Recession, the U.S. consistently burned about 1.1 billion tons of coal annually. And as recently as 2005, coal fueled about half of America's electricity.

Coal's woes snowballed in 2012. Demand dipped in 2009 as the overall economy suffered, but then staged a small rebound as GDP growth picked up and power demand recovered. It was only in 2012 that coal consumption nose-dived, with demand slumping to a bit less than 900 million tons. Utilities were gobbling up cheap natural gas and contemplating the Obama administration's looming regulatory crackdown on power plant pollutants such as mercury. Since gas was both inexpensive and burns cleaner than coal, the shift made both economic and legal sense. (Continued below.)

Fast-forward to 2015, which will go down as coal's worst year in about three decades. Government statistics on usage for the full year aren't in yet. But through the first nine months of 2015, coal consumption fell by 10% from the same period of 2014. That puts 2015 on track to see the lowest level of coal use since about 1985. Ouch.

Things won't get better for coal in 2016. Odds are they'll get worse. Why? Utilities are still decommissioning older, coal-fired power plants as they prepare for implementation of the Environmental Protection Agency's Clean Power Plan, which seeks to reduce carbon dioxide emissions. States, which are responsible for meeting emissions reduction targets set for them by the EPA, will have a number of options for doing so. One major strategy figures to be shifting away from coal-fired electricity because burning coal emits more carbon dioxide per unit of power produced than burning natural gas does.

Don't count on overseas demand to bail out U.S. coal miners. Though many countries continue to depend heavily on coal for power generation, it's not clear that their consumption will grow enough to make shipping more of America's coal abroad cost-effective. China, the biggest coal consumer by a long shot, raises particular concerns about future coal demand. Its economy is clearly slowing (though by how much no one seems to know), and the air pollution in China's big cities is well documented. A cooling industrial sector means less need for coal-fired power. And cleaning up the dirty skies in Beijing and elsewhere probably means burning less coal in the long run.

Indeed, the International Energy Agency has turned notably pessimistic about the outlook for coal consumption. In its 2015 global coal market report, published last month, the energy watchdog projects that total demand will edge up by an anemic 0.8% annually in coming years. The IEA even considers it possible that Chinese coal usage has already peaked and will fall over the next several years, which would cause global consumption to actually shrink slightly. Just one year ago, the IEA was predicting strong demand growth, both globally and in China.

U.S. coal exports are already skidding. We see no reason to bet on a turnaround. Through the first half of 2015, America exported 20% less coal than during the same period of 2014. And that was before Chinese financial markets started signaling a worrisome slowdown there in August. Again: Ouch.

The bottom line: Coal's long-term future looks increasingly bleak. The oil markets are in turmoil right now, but at least global demand for oil is still growing at a modest pace. Unlike oil, which is the dominant fuel for powering all manner of vehicles, coal faces mounting competition in its chief role of generating electricity. Utilities now derive as much electricity from natural gas as they do from coal in the U.S. And it's not hard to imagine a future where renewable power becomes more competitive with coal, both here and abroad.

A Note on Fuel Cells

An alert reader recently queried us as to why Congress opted not to extend the 30% federal tax credit for hydrogen fuel cells when lawmakers acted to extend tax breaks for solar power. We sought an answer from the Fuel Cell and Hydrogen Energy Association.

FCHEA President Morry Markowitz called the omission of fuel cells in the year-end deal an "inadvertent error," one that his group is pushing lawmakers to rectify early in Congress's new session. Extending the expiration of the 30% tax credit from the end of this year to the end of 2019 "will get done sooner rather than later," he predicts.

There's no way to know for sure what lawmakers will do. But assuming the fuel cell industry belatedly gets the same treatment that solar power did, that would be a real boost for hydrogen-based power. Of the top 100 firms that make up the Fortune 500 list, 23 use fuel cells in some capacity, for either backup or primary power generation. That's a number we expect to see climb, especially if Congress locks in the federal tax credit for fuel cells for a few more years.

Sincerely,

Jim Patterson

jpatterson@kiplinger.com

P.S. Don't hesitate to write me, directly with questions or comments about any of the topics we cover, or anything else energy related. You can find previous issues of Kiplinger's Energy Alerts or Kiplinger's Tech Alerts here.