Institute for Energy Economics and Financial Analysis Presentation to Center for American Progress and Climate Solutions March 1, 2012 Washington, D.C. Tom Sanzillo Director, Financial Analysis Coal Exports: Why Now? Economic Dynamics

Coal Exports. Why Now? Economic Dynamics 2 Institute for Energy Economics and Financial Analysis (IEEFA) Basic Mission: Reduce use of coal and build more diverse energy economy. Strategic Research and Technical Assistance Training Advocacy

Coal Exports. Why Now? Economic Dynamics 3 America’s Coal Fleet without pollution controls is Aging Plan proposed 151 new coal plants to replace old, mostly coal plants. – By 2010, 153 individual plant investments cancelled, $243 billion. PSC, Utilities – the coal finance complex changes its mind. Since 2009, 28+ GW of coal plants announced retirements. Debate in industry – how much more? What changed: – Natural Gas – Age of Plants – Economy – Coal Market Fundamentals – Regulations

Coal Exports. Why Now? Economic Dynamics 4 Coal Market Fundamentals: 1.1 billion tons per year, most for electric generation. – Decline of Central Appalachian production. Rising price, cost of production. Domestic steel and export. – Rise of Powder River Basin - Wyoming/Montana Dominant, federally owned – Rise of Illinois Basin – recent rise in production. – Northern Appalachian – changing domestic to export. – Potential Colorado estimated growth due to export. – General Cost of Production: PRB, NAPP, ILB – Electricity Markets, Not Enough --- Exports.

Coal Exports. Why Now? Economic Dynamics 5

6 Cloud Peak Energy 2011 Performance 2011 Coal Production (million tons) Production Percentage 2011 Revenues (billions $$) Revenue Percentage Total % % Asian4.74.8% %

Coal Exports. Why Now? Economic Dynamics 7 One PRB Coal Producer places the net margin from current domestic sales at $4.19 per ton and estimated net margins from exports at $14.59 per ton.

Coal Exports. Why Now? Economic Dynamics 8 How much coal is to be exported? Upward Trend: 48 million tons ‘01; 107 mt –‘11 (volatility) – Industry Projection: 174 million tons by 2015 – all regions/all ports. Mostly, eastern coal. – Focus on PRB: Current Production – 480 mt. rising. Current export production 6.6 mt in Expansion estimates in excess of 125 million tons. Multiple ports planned Use of Canadian Ports Intensified use of existing ports within US (Gulf), Great Lakes.

Coal Exports. Why Now? Economic Dynamics 9 What happens to the price of PRB coal? Market currently low. Upward price pressure – mid and long term. – Cost of production – intensified demand – Domestic demand – Exports and price pressure. Central Appalachia – Cost of Production/Globalized Pricing. Recent Pressure in Colorado Stock Analysts Lease Prices – highest prices in history Speculative Interest – Traders and Mining Exclusively for Export.

Coal Exports. Why Now? Economic Dynamics 10 What are the economic dynamics of rising PRB coal prices? Coal Industry Study “Powering America” – Wyoming Mining Association History of PRB Coal. Low Cost = Low Price of Electricity. – ‘ 70’s to present: 5% to 45% of electricity coal in nation. – 38 States use PRB Coal = Low Electricity Rates – 47 States benefit from coal producer expenditures – Midwest industrial producers – competitive on global market. If PRB Coal replaced by alternative fuels, costly. Electricity prices rise. Modeling: Existing Rates + Impacts from Higher Rates = New Higher Rates New Economics – erode benefits to residential consumers, jobs and competitiveness. Report written at a time (12/09) of higher natural gas prices.

Coal Exports. Why Now? Economic Dynamics 11 Will an increase in PRB coal prices have the same impact on economy as substitution of ‘costly alternatives’? Low price of PRB disappears. Low cost of electricity disappears. – 37 states upward pressure on regulated/unregulated electricity markets. – Generalized pressure on coal prices cause new rate adjustments in recently decided retrofit cases (e.g. Xcel case) and reconsideration of existing retrofits. – Those states wedded to coal lose economic benefits of low electricity prices – jobs and other benefits. – Erosion of benefits is specific to consumer states. – Also, generalized.

Coal Exports. Why Now? Economic Dynamics 12 What are some questions about economic dynamics? Where mining and rail sector were in historic alignment (low cost electricity) with utility, industrial, heavy construction and regional interests, does export strategy change the domestic economic growth calculus? What is the nature of the new domestic coal consensus – coal producers, terminal developers and operators, rail, international shipping and local interests ? Is the national status of coal as a politically protected class and the business incentives afforded to it still warranted for purposes of exports?