Tom Power - February 05, 2007

Coal Development

Why Has Montana Not Developed Its Coal?

As has been true of every meeting of the legislature for at least the last 25 years, the need for state government action to “jump start” coal development in Eastern Montana is the subject, directly or indirectly, of much proposed legislation.
Coal development advocates ask rhetorically why we are not developing one of the largest and richest resources Montana has, the coal deposits that underlie most of Eastern Montana? The nation and the world are short of energy; we have lots of it in the form of coal; we ought to be taking advantage of that worldwide energy demand. Since we are not, it must be the government’s or the courts’ or the environmentalists’ fault. One or the other or all three must be preventing our private energy entrepreneurs from pursuing this economic opportunity that has been staring us in the face for 30 or more years.
The actual economics, however, may be less compelling than the folk economic wisdom we are being offered. Having lots of something does not necessarily indicate market opportunities. Eastern Montana has lots of land, but people have been abandoning it and moving elsewhere for 80 years of more. Not only do you need a supply of something, but the cost of using it and the demand for its output are also crucial. Montana coal, like Eastern Montana land, represents limited economic opportunities for both of those reasons.
One could ask why we are not building coal-fired electric generators to serve Montana needs? The fact that total electric consumption in Montana has fallen, not risen, since 1990, primarily because of the dramatic declines in industrial loads, may have something to do with that. The fact that demand is also projected to grow at only about two percent per year or a little over 200 average megawatts over the next twenty years may explain why we are not now building 500 or 1,000 megawatt plants to meet that limited future need.
It is not only Montana that has been cautious about investing in coal-fired generation over the last decade and a half. Neighboring Wyoming, usually offered as an example of what the coal industry unburdened by government restrictions can do, saw electric sales increase 15 percent during that time period but has added only about 4 percent to its coal-fired generating capacity. When internal markets are growing slowly, basic economics would dictate that investment in new supply grow only slowly too.
Of course, our coal-fired electric industry does not have to be limited to markets within the state, it could aim at exporting electricity to other regions. But the Pacific Northwest has had an adequate supply of electricity for many years and is projected to continue in supply balance for several more. Nor has our unregulated neighbor to the south, Wyoming, been on a coal-fired generation building spree over the last decade and a half to serve regional demand across the West.
To sell coal, we do not have to first convert it into electricity. Long trains carrying coal to electric generators located out of state roll east and west out of Montana every day. But transporting coal from Montana to the most rapidly growing markets to the south and southwest costs a lot more than from Wyoming simple because Wyoming is several hundred miles closer to those markets.
Converting coal to electricity and then shipping it out-of-state also requires a transportation infrastructure, high-voltage transmission lines, and someone willing to pay the costs associated with expanding those lines. So far, no one has stepped up to the plate to do that in Montana or Wyoming. But there is pressure on both the Wyoming and Montana state governments to subsidize the equivalent of a “railroad” for exporting electricity by forcing utility customers to pay for that infrastructure whether or not it turns out to be needed and cost-effective.
Wyoming, with its transportation cost advantage, has been able to substantially increase its sales of coal even if it has not been able to increase the conversion of coal into electricity within the state. Between 1981 and 2000, Wyoming coal production more than tripled, rising to a level 10 times higher than Montana production. If we could find a costless way of shipping our coal across Wyoming, we too could compete for those southern and western markets. Alternatively, if we could magically revitalize the economies of the Great Lakes rust belt, we would face rapidly growing demand where we have the transportation cost competitive advantage relative to Wyoming.
Of course, there is a whole new cost associated with the use of coal that towers over contemporary energy markets: The present and future costs associated with dumping huge quantities of greenhouse gases into the atmosphere or capturing and safely storing those global warming gases. That very real cost has many practically-minded investors hesitating over building large conventional coal-fired plants. California has already closed its markets to electricity from such dirty conventional coal sources and Oregon and Washington may do the same, closing off the most populous electric markets in the West to conventional coal-derived electricity.
Whether Montana’s coal represents an economic opportunity or not will depend on the costs associated with developing it, transforming it into safe and useful energy forms, and delivering it to customers. Those basic economic costs have limited coal development in Montana thus far. What a lot of coal enthusiasts hovering around Helena right now want is for the government to shift some of those very real costs from the coal developers and coal users to the citizens of Montana or the nation. Rather than reduce or eliminate those costs, thus making Montana coal safe, attractive and competitive, they simply want to shift the costs to someone else. That is a profoundly anti-economic strategy that can only leave the citizens of Montana, the landscape of Montana, and, ultimately, the entire planet worse off.