The Future of AML Funding

and Changing Prospects for Coal Mining

Director Joseph PizarchikOffice of Surface Mining Reclamation and Enforcement

PA AMR Conference, June 22-23, 2016

New Issues for AML Program and Funding

• The AML Fund has and will continue to be dependent on active coal mining

• Coal production is down significantly and unlikely to return to previous levels

• Can the AML Fund be sustained with a collapsing market?

• Can restoration of original fees be justified?

• Who benefits from the low cost of coal ?

• Is the AML Fee a benefit or a burden?

Current Coal Mining and Long-term outlook

• Examine what is occurring and why; then examine the future of AML funding and reclamation

• Coal undergoing significant downsizing

• Coal is dependent on coal-fired power generation

• Accelerated rate of retirements for aging coal-burning power plants

Source: Data from EIA 2016 Electricity Generation, prepared by OSMRE

Where is the industry headed in the long-term?

• Downsizing does not mean a demise of coal mining or reclamation

• Downsizing is simply the market “right sizing”

• The pace of coal-fired retirements is expected to slow after 2016

• Coal: essential component of the national energy portfolio

• Most industry analyst foresee coal mining to stabilize and maintain a production level 650 – 750 million tons annually

Source: Data from EIA 2016 Electricity Generation, prepared by OSMRE

Source: Data from EIA 2016 Annual Energy Outlook, Early Release May 17, 2016, prepared by OSMRE

Factors Influencing EIA’s Long-term Coal Outlook

• Capacity factor (c.f.) – ratio of what power plants are generating over a given period compared with production from operating full-time on continuous basis over the same period (Assumed 75% by EIA)

• Capital Upgrade – investment needed to sustain a prescribed capacity factor (average $17kW/year)

• Fuel price differential - the cost of 1 million BTU’s from coal versus natural gas

Key Reasons for EIA’s Over-Projected Coal Supply and Use

• Coal generating capacity –too optimistic• The National Energy Technology Laboratory (NETL)

determined a much lower c.f. than EIA • Aging plant c.f. based on actual data declining more

rapidly than previously assumed by EIA • NETL found upgrades must occur in large outlays or

“lumps” rather than gradual annual increments – this influences decision of exactly when to retire or upgrade

AML Reclamation’s Role in Economy

• Primary objective of AML reclamation is to eliminate risk to public health and safety

• AML pays a “double dividend” – eliminates risks to public – Contributes to economy

• Contribution to economy – expenditure impacts – Immediate and direct impact of jobs for onsite work– Indirect jobs from supporting off-site activity (environmental

remediation and engineering services)– Household spending creates “Ripple effect” – local businesses

are supported

AML Reclamation and Contribution to Ecosystem Valuation

• Ecosystem services are benefits that flow from nature to people such as water purification, coastal protection, and places to recreate

• “True value” of ecosystem services often not reflected in economic contribution, yet there is willingness to pay e.g. recreational sites –willingness to pay is more than what one actually spends

AML Reclamation and Contribution to Ecosystem Valuation (continued)

• A new initiative - All Federal Agencies are tasked to incorporate ecosystem services valuation in Federal decision-making

• OSMRE is working with DOI on guidelines and methodology for better measures of benefit from restoration

• AML reclamation would see higher payoff to society than current measures from simple expenditure impacts

AML Funding and Fees

• Bright Spots: $90M Pilot; FY 2017

• Restoring the fee structure to original levels could replenish funding from reduced mining

• Nation-wide uniform fees are similar to a tax borne by users or those who profit from coal

• The power generating sectors will achieve substantial benefit from savings in coal cost over the next decade

Source: Revenue and Expense Statistics for Major U.S. Investor Owned Electric Utilities, DOE-EIA for 2014

Restoring AML Fee Implications • AML fees are insignificant from a power generators perspective

and do not reduce demand for coal

• Recapture of savings the coal industry gives to the power generators through an AML fee is wise public policy

• As a matter of public policy, the AML fee represents a well-meaning instrument to transfer economic benefit toward better use for society - more will benefit with fee than without fee

• Where are the needs?

Leading States with Abandoned Coal Mines (AML)

Unfunded CostCompleted or Funded Total Cost

Percent Unfunded of

Total Cost State $ millions Pct

Pennsylvania 3,848 657 4,505 85.4West Virginia 918 611 1,529 60.0Kansas 704 41 745 94.5Kentucky 347 508 855 40.6Ohio 205 107 311 65.8Indiana 192 91 283 67.8Alabama 173 51 225 77.1Illinois 116 127 242 47.7Virginia 88 112 200 44.0Oklahoma 83 35 118 70.5Missouri 70 50 120 58.1Iowa 55 40 95 58.0Alaska 52 23 75 69.9North Dakota 37 48 85 43.5Maryland 32 30 62 51.3New Mexico 27 16 43 62.6Colorado 23 29 51 44.1Wyoming 17 122 139 12.2Arkansas 13 29 43 31.4Other States 5 57 62 7.4Total 7,005 2,783 9,788 71.6Source: AMLIS 2016

Summary• Despite downsizing of coal mining as an industry, coal will remain as an

important component in the national energy portfolio• The long-term outlook for coal and coal-powered generation is for

increased efficiency and profitability but a smaller industry

• The AML Fund, the fees, and reclamation program can be sustainable

• Sharing the savings the mining industry is giving to power generators makes good economic sense

• Giving the benefit back to coal country where it is most needed is wise public policy and helps everyone.