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This story is published as part of Covering Climate Now, a global journalism collaboration strengthening coverage of the climate story.
Inthe normal course of business, healthy companies succeed and sickly companies fail. But the coronavirus has interrupted the normal course of business, putting even successful firms on life support as they struggle to pay for sidelined workers and shuttered storefronts. The government’s goal, in theory, should be to keep these companies alive without lending a dime to firms that were already going under.
But the Federal Reserve could fall short of this aim by giving a jolt to fossil fuel companies that were failing before the coronavirus. Through its recently announced debt buyout programs, the Fed could end up giving aid to energy companies whose financial woes predate the pandemic by at least half a decade.
“If you listen to the oil industry, you might think that its crisis began in March, and that’s what they want everyone to believe,” said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis. “They want everyone to forget about the last six years.”
Over the last decade, fracking unlocked new reserves of oil and gas. For a time, business seemed promising. But as firms flooded the market with cheap fuel, prices began a swift and precipitous decline, dropping from more than $100 a barrel in 2014 to around $30 in 2016. The market never fully recovered. Oil and gas companies took a hit and — because low-cost natural gas edged coal off the power grid — mining companies did as well.
“Fracking has literally broken the business model of the entire fossil fuel sector,” Williams-Derry said.
Today, fracking operations are plagued by bankruptcies, and oil and gas stocks are imperiled by the divestment movement. In the last month, with would-be drivers huddled indoors and Saudi Arabia and Russia each dumping cheap oil on the market to undercut the other, supply so outpaced demand that the price of a barrel of oil briefly fell below zero.
Coal is in even worse shape. Eleven coal companies have filed for bankruptcy since President Trump took office, and the future of the industry looks increasingly dim. Nearly half of all coal plants worldwide will lose money this year, stymied by cheap renewables and natural gas. And the coronavirus isn’t helping. With power demand in a lurch, utilities are leaning more on wind and solar power, which have no fuel costs. On a few days recently, wind turbines supplied more electricity nationally than coal.
The grim reality of fossil fuels has made it hard for coal miners and oil and gas drillers to raisemoney on Wall Street, so companies have tried to raise capital by selling corporate bonds. Companies pay interest to bondholders until the bond is due, at which point they pay back the full value of the bond.
This is where the Fed comes in. Through its debt buyout programs, the Fed is empowered to buy new bonds issued by any corporation that has a decent credit rating — a score given to companies based on how likely they are to pay their debts. To make sure they only aid companies that were healthy before the coronavirus, they are buying bonds from firms that had a credit rating of BBB- or higher from as of March 22.
“You can’t lend to a corporation that is for sure going to fail. That is not reasonable,” said Wenhao Li, assistant professor of finance and business economics at the University of Southern California. Though, there is no firm line between healthy and unhealthy. “Investment grade BBB- already has a lot of risks,” he said. – “A better investment strategy than putting money into that ETF in 2014 would have been to take your money, burn half of it, and put the other half under your mattress,” Williams-Derry said. “In 2014, the kooky divestment activist was actually a savvy investor compared to the rest of Wall Street.”
Wind generated more electricity nationally than coal on three separate days over the past six weeks, according to an E&E News review of federal data.
Such a milestone would have seemed unthinkable a decade ago, when coal accounted for almost half of U.S. power generation. But the last 10 years have seen coal’s position steadily erode due to a combination of slack electricity demand, mounting concern over climate, and increased competition from natural gas and renewables.
The novel coronavirus only has intensified the industry’s pain. Steve Cicala, a professor who studies power markets at the University of Chicago, reckons that electricity demand is down 8% as a result of the economic lockdowns designed to halt the virus’s spread.
Coal has borne the brunt of that decline. Wind and solar generation has been largely unaffected because they have no fuel costs — meaning that utilities turn to them when available. Natural gas prices, meanwhile, are mired near historic lows. That has left coal as the fuel to be curtailed.
Coal represented 16.4% of U.S. power generation over the last month, down from 22.5% the same time last year, according to the Rhodium Group, an independent research firm. Wind and solar generation, by contrast, rose from 10.7% of generation this time last year to 12.2%.
“I think in a lot of ways it’s just sort of fast-forwarding to the future of our grid,” Cicala said. –
There now appears to be days when wind generates more power than coal on its own. On March 8, wind output was almost 1.4 million megawatt-hours, according to U.S. Energy Information Administration data. Coal generation that day was 1.3 million MWh. The feat was repeated on March 28 and April 12.
Joe Daniel, a power sector analyst at the Union of Concerned Scientists, said the development mirrors trends in the United Kingdom, where wind generation quickly overtook output from coal plants. There are now days when the British grid is coal-free.
“This is the natural progression from an energy system making the transition from fossil fuels to cleaner forms of energy,” Daniel said.
There are several caveats to consider with the wind surge. Coal generation typically falls in the spring, when electricity demand fades. Many utilities plan scheduled maintenance for the spring months. And coal generation still regularly exceeds wind.
Wind’s new, if brief, parity with coal nevertheless demonstrates the long-term challenges facing the coal industry, said Mark Dyson, who tracks the power sector at the Rocky Mountain Institute. Coal plants are expensive to maintain. Those costs get harder for utilities to justify when they run less and less.
“We anticipate coal generators to continue the trend of announced retirements and perhaps faster than they otherwise would have, because they have been run less,” Dyson said.
