Why stagnant electricity demand is bad for coal companies

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Dec. 4 2020, Updated 10:53 a.m. ET

Types of coal

As explained in our earlier series on US coal producing regions, coal is divided into different ranks. The ranks are based on vintage and other characteristics. For usage, coal is divided into two types:

  1. Steam—or thermal—coal is used in power generation
  2. Metallurgical—also known as coking or met coal—is used in steel production

Cloud Peak Energy and Peabody Energy (BTU) only produce steam coal in the US. In contrast, Walter Energy (WLT) calls itself a “pure-play met coal producer.” Other coal producers (KOL)—like Arch Coal (ACI) and Alpha Natural Resources (ANR)—produce thermal and met coal.

The majority of the coal produced and consumed in the U.S. is steam coal. In this series, we’ll focus on domestic steam coal demand. Steam coal is mainly used to generate electricity. As a result, steam coal’s key driver is electricity demand. We’ll start by analyzing electricity demand.

Stagnant electricity demand

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Utilities generate electricity according to demand. We’ll use electricity generation as a substitute for electricity demand. As shown from the above graph, the growth in electricity demand in the U.S. has been slow since the 2008–2009 financial crisis. The electricity generation in 2013 was better than 2012. However, the electricity generation still behind the 2008 level. The Lehman Brothers burst in 2008.

In 2013, electricity generation growth was mainly due to increased demand towards the end of the year. Electricity demand increased because of the severe winter.

Demand growth to fall

Electricity consumption increased during first seven months of 2014—compared to the same period last year. It increased by 1.8%. The increase was due to higher demand from January through March. The increase was a result of the severe winter.

The winter is supposed to be normal this year. According to the U.S. Energy Information Administration (or EIA), the consumption growth for the whole year is expected to fall just below 1%. In 2015, the EIA expects the consumption to remain flat.

Electricity consumption has been a key driver for domestic thermal coal demand for decades. However, the shale gas boom and new regulations caused coal’s market share to drop. Natural gas availability is another key driver for coal demand. We’ll discuss this more in the next part of the series.

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