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Largest US coal producer Peabody Energy shifts investments to renewables

04 March 2022 IHS Markit Energy Expert Kevin Adler

After years of cratering sales and growing policy headwinds from climate change concerns, Peabody Energy announced plans on 1 March to build thousands of megawatts of renewables and batteries at or near its coal mine sites in the Midwest, a landmark strategic shift by the largest steam coal producer in the US.

The new business, dubbed R3 Renewables, follows years of financial struggle for Peabody, including a 2016 bankruptcy filing covering the majority of its US coal operations and a failed 2019 effort to form a joint venture with Arch Coal in the Powder River Basin in the Rocky Mountain area. That JV was aimed at cutting costs so the companies could better compete with low-cost shale gas and increasingly cheap solar and wind.

Peabody, which has secured funding from Riverstone Credit Partners and Summit Partners Credit Advisors for the renewables venture, did not detail the size of its overall investment in renewables, but said its deployment plans are substantial. Over a five-year period, the company plans to build more than 3.3 GW of solar generation and 1.6 GW of battery storage capacity.

R3 Renewables initially will focus on development of six potential sites on large tracts of land on or near previous coal mining operations in Indiana and Illinois, Peabody said. "The portfolio size and strategic site locations, each of which is in close proximity to grid injection points, offer the potential for the development of the largest solar and battery storage projects in both Indiana and Illinois," the company added in a press release.

Coal's decline

Peabody's announcement reflects a long losing battle in which the US coal industry has seen most US utilities commit to phasing out their carbon-heavy coal plants to address increasingly urgent climate change concerns and escape ever stricter federal and state rules on emissions causing air pollution.

The coal industry and coal-producing states are trying to slow the transition on various fronts, including a lawsuit heard by the US Supreme Court on 28 February about where and how the US Environmental Protection Agency can regulate GHG emissions from coal-fired plants. But regardless of the outcome of that lawsuit, no analyst is projecting domestic growth in demand for coal in the long term.

In a February market forecast, the ENR division of S&P Global Commodity Insights stated that it expects 135 GW of US coal-fired capacity to be retired in the next eight years, leaving a mere 80 GW in operation by 2030.

Two other recent announcements underscored the retreat from coal, as American International Group (AIG), the 10th-largest insurance company in the US, said it will no longer make investments in nor insure new coal-fired power, thermal coal mines, or oil sands, effective on 1 March. Also, by 1 January 2030, it will end all insurance and investments in companies that derive 30% or more of their revenue from those types of operations.

The announcement came the same week that US Treasury Secretary Janet Yellen said her agency will deliver a report by the end of 2022 on climate-related risks in the insurance industry.

The new policy from AIG, with nearly $600 billion in assets, came with a statement from CEO Peter Zaffino that AIG seeks to source 100% renewable energy for its operations by 2030 and to reach net-zero emissions for its global underwriting and investment portfolio by 2050.

Though Zaffino did not mention advocacy efforts to push the company to this decision, Public Citizen said on 2 March that AIG is now the eighth of the 10 largest US insurers with phaseouts of insurance for the coal industry. Only Berkshire Hathaway and W.R. Berkley are holdouts. Public Citizen tweeted after the announcement: "Organizing works. Now, all insurers must stop supporting fossil fuel expansion."

On 28 February, multinational electric utility AES announced its intention to exit all US coal generation by the end of 2025, accelerating prior plans. In the US, it has coal operations in Hawaii, Indiana, Maryland, and Puerto Rico, totaling more than 3,100 MW of capacity.

Peabody's ESG goals

For several years, Peabody has had in place its own environmental, social and governance (ESG) program, though coal phaseout was not on its agenda. Its 2020 ESG performance review promised "the development and deployment of high-efficiency, low-emissions and carbon capture, use and storage technologies, as well as other technologies, to achieve goals of substantial reductions in greenhouse gas and other emissions."

The new policy highlights how ESG is becoming a more critical issue for fossil fuel producers as leading investment firms turn away from companies seen as contributing to climate change. Peabody President and CEO Jim Grech said R3 Renewables would create "additional value from our existing assets, supporting our own and our customers' ESG ambitions and providing added economic benefits for the communities in which we work and live."

The company's announcement also echoed US President Joe Biden in suggesting its new clean energy venture would generate jobs and fresh economic drivers for coal-dependent communities that have suffered along with the declining industry. Clean energy as a job creator was one of the themes of Biden's State of the Union address on 1 March.

Coal market looking steady through 2023

Despite the impact of climate concerns, Peabody last year saw a revival of its financial fortunes, in large part because prices for coal rose along with natural gas as global economic growth rebounded. Last year Peabody reported it sold 130.1 million metric tons (mt) of coal, down 2.5% from 132.6 mt in 2020. However, its revenues of $3.3 billion in 2021 were 15.2% higher than in 2020, reflecting higher coal prices and increased power demand as the global economy recovered from the worst of the pandemic. That rebound led Peabody to report net income of $371.4 million in 2021—a sharp turnaround from the firm's $1.9 billion net loss in 2020.

Investors liked the idea of Peabody joining the energy transition, as the company's stock jumped by $1.42/share, or 8.2%, to close at $18.76 on the day of the announcement. It continued to surge throughout the week, closing at $22.97 on 3 March, or a gain of 31.7% in three days. The stock price as $17.43/share at closing on 28 February, prior to the announcement.

In November 2020, Peabody's price was $1.17/share during the depths of the global COVID-19 shutdown.

Looking forward, Peabody has said it expects the relatively strong market conditions for coal to last for a while, in part because US natural gas prices are expected to remain high. "The near-term outlook for all our operating segments continues to be favorable with strong market indicators and increased global demand providing a persuasive story for coal and Peabody," said Grech on the investor call about the R3 venture.

For the US overall, the Energy Information Administration (EIA) said a trend of small annual gains will continue: coal production in 2020 was 535.3 short tons (st), and it increased to 578.4 million st in 2021. EIA says US production will increase to 606 million st in 2022 and 624.3 million st in 2023. But those numbers are barely half of the level in 2010, when US coal production was nearly 1.1 billion st.

Original article by Jason Fargo, The Energy Daily. Contributions by Kevin Adler.

Posted 04 March 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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