# Presentation: 057613

## Peer Review ofCoal Supply Curve DevelopmentMethodology and Results

- Peer Review Committee
- Prepared by:
- ICF Resources, Inc.
- October 20, 2003

**Peer Review of****Coal Supply Curve Development****Methodology and Results**

## This draft has been released for general information to peer reviewers and members of the interested public.  The reader should remember that this is an unapproved working draft and that the document should not be used to represent official US EPA or ICF Resources, Inc. views or advice.  Draft documents at this stage of the process often undergo significant revisions before the final version is approved and published.

## Outline

- Introduction
- Project Objective and Key Features
- Coal Supply Curve Development - Methodology
- Coal Reserve Characterization
- Coal Supply Region Definition
- Coal Reserves
- Coal Quality
- Reserve Allocation
- Coal Mine Costing
- Prototype Coal Mine Models
- State Level Data
- Mining Equipment Data
- Miscellaneous Costs
- Cost Components for Sample Mines
- Other Issues
- Outstanding Issues and Next Steps
- Draft Supply Curves

## Introduction

## Coal Market Modeling in IPM

- Coal markets are endogenously modeled in IPM.
- Coal supply, coal transportation, coal grade assignment and coal contracts are the four components of coal market modeling in IPM.
- Geographically dispersed coal supply regions and demand regions (each coal plant is assigned to a coal demand region) are interconnected by a transportation network.
- Each coal supply region can produce and each demand region can demand several grades of coal. The supply and demand of each grade of coal is linked to and affected by the supply and demand of every other coal grade across supply regions.
- In IPM, endogenous demand for coal is generated by coal fired power plants interacting with a set of exogenous supply curves provided for each coal grade in each supply region.  Coal consumption is estimated and coal prices discovered when all coal markets are in equilibrium.
- In this presentation only the coal supply component is discussed — the coal transportation, coal assignment and coal contract components will be addressed at a later stage.

## Coal Supply in IPM

- The coal supply curve is represented as a step function plotting potential annual production versus the minimum acceptable selling price (MASP) with each step representing a particular type of mine.
- The length of each step represents the amount of coal available per year from that particular type of mine and the height of each step represents the minimum price a producer is willing to accept for that coal.
- The supply curves for coal include all costs of production, including operation and capital costs.
- The only variable assumed to change over time is mine productivity. Changes in mine productivity, that include both labor and capital components, are assumed to be the same as changes in labor productivity at the mine (Ellerman, et al. p11).
- Due to the 25-year time horizon of an IPM analysis and the assumption that markets operate in equilibrium in the long-run, coal supply curves are constructed to be long-term cost curves (i.e. curves with prices that support the full fixed, capital, and variable costs of operating the mine).
- Consideration of a short-term disequilibrium, where price could fall below the full amortized price, but still cover variable costs, is not considered.
- Coal resource depletion will be modeled endogenously in IPM.

## Example Coal Supply Curve

## Demand for Coal in IPM

- The demand for coal is driven by the endogenous dispatch of coal-fired units.
- Coal unit dispatch is a function of variable costs of generation, which include the cost of fuel and of air emissions.
- The grades of coal that a coal plant could theoretically burn depend upon the considerations of plant equipment, coal transportation logistics and environmental regulations.
- Hence, the demand for coal in IPM depends on the cost, quality (sulfur, heat, and mercury content), and accessibility of the coal.

## Coal Market Equilibrium 

- Equilibrium in a coal market is achieved within IPM when demand and supply match for each grade of coal at a single price-quantity point.
- Due to the “step-function” shape of coal supply curves the marginal cost of the coal can be different from the step production cost:
- The marginal cost of coal production equals the cost of production at the intersected step when demand curve crosses supply curve in a horizontal segment of the supply curve (see Equilibrium Example #1).  In this case, all demand for coal at that price is satisfied.
- The marginal cost of coal is higher than the production cost when demand crosses supply in a vertical segment of the supply curve (see Equilibrium Example #2).  In this case the price is set by the price of competing fuels.
- Examples 1 and 2 are a simplified representation, as the impact of coal transportation is not captured.
- The solution to an IPM case is determined, in part, when all coal markets are in equilibrium.
- An IPM analysis may not result in every grade of coal being produced in every coal supply region as this decision is endogenous, and based on economics.

## Coal Market Equilibrium - Example #1

## Coal Market Equilibrium - Example #2

## Coal Transportation and Coal Grade Assignment

- In addition to the cost of producing coal, the cost of transporting coal to consumers and the grades of coal that a plant can combust affect the market equilibrium.
- Specifically, the cost of coal to a consumer is the sum of the cost of supply and the cost of transportation.
- Power plants may also demand grades of coal that may not be the cheapest due to equipment or environmental considerations.
- For simplicity, in the previous examples, the coal transportation costs across all coal types (from each supply region to each demand region) are assumed to be identical.
- Coal transportation assumptions and coal grade assignment rules are currently in development, and will be presented at a later stage.

## Project Objective

## 	Develop a set of coal supply curves that captures the fundamentals of coal supply for the United States.

## Coal Mine Costing Model (CMCM)

- The Coal Mine Costing Model (CMCM) is the modeling tool that employs all of the data, assumptions, and methods developed to create coal supply curves for this exercise.
- All descriptions, methods and conclusions presented in this document were incorporated into CMCM, except where noted, to allow the calculation of the supply curves found in Appendix J.
- CMCM stores all data and assumptions used to determine each price-quantity pair, and ensures results will be traceable and reproducible.

## Peer Review Charge, Question #1:  Is the engineering economic framework appropriate to use in the construction of supply curves?

## Coal Supply Curve Development - Key Features

- Coal supply curve assumptions were developed with an attempt to:
- Develop a methodology that allows for rapid update of input assumptions.
- Use current data to the extent available in regards to the coal reserves in the ground in the United States.
- Develop coal supply curves that provide enough resolution to allow analysis by
- Geography,
- Coal rank,
- Coal quality – Sulfur Content and Mercury Content.
- Explicitly incorporate coal supply fundamentals using an engineering economic framework that incorporates:
- Existing and potential (greenfield) mines, distinguished by the types of applicable costs.
- All relevant surface (truck and shovel, dragline, and contour) and underground mining methods (long wall and continuous), using the appropriate equipment and labor for producing coal.
- Labor and equipment costs by state/region and mining method.
- Taxes and royalties specific to each state.
- Evolution of labor and capital productivity improvements over time.
- Geological characteristics of coal reserves in the ground.

## Engineering Economic Framework allows for Modeling Coal Supply Fundamentals

- Coal reserves are geographically dispersed and span a range of quality characteristics, mining conditions and extraction costs.
- Coal supplies of like qualities and location can be represented by supply curves where increasing levels of production require the opening of increasingly expensive mines.
- In a coal supply curve, prices represent the minimum acceptable selling price (MASP) for the associated mine type, which is equal to the marginal cost of extraction.
- MASP’s for existing mines are lower than those for new mines of similar characteristics as already invested capital is considered to be a sunk cost.
- Coal supply curves change over time as technology and productivity changes alter the production cost for mines.
- The coal mining industry is competitive, such that producer competition will hold selling prices to marginal costs for the marginal producer.
- Coal supply curves based on an engineering economic framework allow modeling of scenarios in IPM that assume a significant change in market structure and pattern of consumption of coal.

## Coal Supply Curve - Methodology

## Coal Supply Curve Methodology – Flow Chart

## Coal Supply Curve Methodology - Overview

- Coal supply regions, coal reserve data, and coal quality characteristics are all independently determined.
- Using the above three, reserves associated with each coal quality classification (i.e. each coal grade) are assigned to all relevant prototype mine models in each coal supply region.
- A prototype mine is a modeling construct for determining the MASP of a mine.  Each mining method has a unique prototype mine, and all results are modeled based on these mines.
- Each model mine then has production, equipment and labor scheduling, as well as any geographically specific assumptions implemented.
- Costs for each model mine are calculated for the base model year.
- Costs are recalculated for each model year using productivity improvement data.
- Results are stored, sorted, and printed as static supply curves for each model year, coal grade, and supply region.

## Coal Supply Curve Methodology - Components

- The following slides describe the specific elements in the “Methodology Flow Chart.”
- Cross-references (in blue) are given to appendices which supply detailed data on the items discussed in the slides.

## Coal Reserve Characterization

## Coal Supply Curve Methodology – Flow Chart Block 1: Define Coal Supply Regions

## Peer Review Charge, Question #2:Are the coal supply regions sufficiently differentiated to accurately capture the cost and quality characteristics of the resource base that is likely to be available over the modeling time horizon? 

**Peer Review Charge, Questions #3 - 5:**Was the appropriate data and methodology used to determine available reserves, and were the proper procedures used to assign reserves to regions, new/existing mines, and mine types?

## Define Coal Supply Regions

- Coal reserves are spread out over a large number of states in the United States.
- Reserves vary within a state by coal rank and coal quality.
- The supply fundamentals of reserves are differentiated by several criteria:
- Geological formation differences
- Coal rank, mine type and coal quality characteristics
- Transportation logistics
- In order to accurately capture all production and transportation fundamentals within IPM, reserves are divided into separate regions that only contain coal with similar production and transportation characteristics.
- United States reserves were broken into 38 coal supply regions based on the above criteria.
- States that map to more than one coal supply region
- Kentucky, Pennsylvania, and West Virginia in the east
- Colorado, Montana, New Mexico, and Wyoming in the west
- Individual coal supply regions were defined so that they can be assigned to one of the larger regions typically reported by the industry press and the EIA.

## Coal Supply Region Map

- In addition to the 37 regions depicted here, there are separate coal supply regions for Alaska and Imports, for a total of 39.

## Coal Supply Curve Methodology – Flow Chart Block 2: Coal Reserves

## Assign Coal Reserves to Coal Supply Regions

- EIA 1997 Demonstrated Reserve Base (DRB) was the primary source for developing the United States coal reserves.
- DRB reports coal reserves at the state level by sulfur content range, heat content range, and mine type (surface or underground).
- DRB sets coal reserves in the United States at 508 billion tons.
- DRB estimates were last updated in 1997. Hence, the reserves were adjusted down to account for the depletion due to coal production since then. These adjustments are approximate due to data availability constraints.
- Coal produced in the year 2000 from FERC form 423 was used as a proxy to reduce the amount of reserves not allocated to existing operations for the years 1998 through 2000.
- For the years 2001 through 2005, the same 2000 FERC form 423 data was used to reduce the coal allocated to existing operations.

## Assign Coal Reserves to Coal Supply Regions (contd.)

- Reserves in this context refers only to the proven presence of coal in each reporting category.  No consideration is given to the cost or profitability of extracting the coal.  However, the accessibility and recoverability of coal is taken into account:
- Due to geological or societal limitations (local zoning, environmental legislation, or existing development at the site), not all coal reserves are available to be mined.  These reserves are referred to as *inaccessible*.
- Due to safety concerns or technological realities (coal in the pillars of an underground mine) not all coal at a mine can be extracted.  These reserves are referred to as *unrecoverable*.
- Accessibility and recoverability factors were published with the DRB in order to provide perspective on the amount of minable coal in the United States.
- Applying these factors to the reserves of the DRB yields the total amount of minable coal for which supply curves must be generated.
- The EIA estimates that 54% (274 billion tons) of coal reserves in the United States are accessible and recoverable.

## Assign Coal Reserves to Coal Supply Regions (contd.)

- Reserve estimates are differentiated by:
- State — except for Alaska, Kentucky, and Pennsylvania, each of which had two distinct regions reported in DRB.
- Surface or underground coal seams.
- Heat content of coal (5 categories ranging from less than 15.00 MMBtu/Ton to greater than 26.00 MMBtu/Ton). The DRB coal reserves are assigned to coal ranks based on heat content.
- Bituminous – > 20 MMBtu/Ton
- Sub bituminous – between 15 and 20 MMBtu/Ton
- Lignite – < 15 MMBtu/Ton
- Sulfur content of coal (6 categories ranging from less than 0.80 lbs SO2/MMBtu to greater than 5.0 lbs SO2/MMBtu).

## Assign Coal Reserves to Coal Supply Regions (contd.)

- The recoverable and accessible reserves explained earlier are separately allocated to existing mines (mines already producing coal) and to potential mines (mines that have not yet been opened). The amount of coal assigned to existing mines is taken from the EIA Coal Industry Annual table “Recoverable Coal Reserves and Average Recovery Percentage at Producing Mines by State and Mine Type, 2000.”  Estimates of the amount of surface and underground coal in the table is then divided into heat rank and sulfur content assuming a profile for existing mines parallel to the DRB profile for the state.
- The coal available to potential mines in each coal supply region is the amount of coal that is recoverable and accessible (as reported in the DRB) minus the amount allocated to existing mines.
- In states with multiple coal supply regions, the reserves were divided by applying heuristics using the USGS US Coal database and the 1999 EPA Utility Mercury ICR database of coal shipments:
- If specific grades of coal were present in one supply region in a state and not in any others, all coal of that grade was assigned to the region indicated by 1999 EPA Utility Mercury ICR and USGS databases.  This procedure was used for the AS, CD, CG, ME, MW, and WG (for bituminous coal) regions.
- If coal grades were present in multiple supply regions in a state, coal was assigned to each region based on the percentage of coal present in each supply region in the USGS and 1999 EPA Utility Mercury ICR databases.   This procedure was used for the CS, CR, CU, and WG (for its share of subbituminous coal), WP regions.
- In certain cases, coal supply regions are assigned all of the coal of a certain rank within a state, due to the geology and geography of the coal beds. For example, all of the bituminous coal in Arkansas is in the northwest corner of the state, in the coal supply region, AN.
-       **(See Appendix A for detailed data on the recoverable reserve assumptions used in this coal supply curve update.)**

## Coal Supply Curve Methodology – Flow Chart Block 3: Coal Quality

## Peer Review Charge, Questions #7 – 10:Were all the appropriate coal characteristics identified?Are there enough categories for each characteristic to adequately capture the variation within the characteristic?Were appropriate data and procedures used to assign those characteristics to reserves for new and existing mines?

## Coal Quality Characteristics

- Coal reserves in the DRB are aggregated by heat content range and sulfur content ranges.
- Coal rank for each coal in each region is assigned based on the heat content range from the DRB. After assignment of reserves to coal supply regions, the following coal characteristics are assigned to those reserves based on data from the 1999 EPA Utility Mercury ICR and EIA Form 423 databases, which provide specific data on coal currently produced in the United States:
- Heat Content (wet basis)
- Sulfur Content
- Mercury Content
- Ash Content
- Chlorine Content
- The coal reserves in the DRB are assigned to one of six sulfur content ranges  (expressed in units of lbs/MMBtu of sulfur dioxide).
**(For a detailed breakdown of the coal quality characteristics in each of the 39 coal supply regions, see Appendix B)**

## Assign Coal Quality Characteristics to Coal Reserves

- Based on the coal rank and the sulfur content ranges, coals are categorized by IPM coal type. The first character refers to the coal rank (B = bituminous, S = subbituminous, L = lignite) and the second character refers to the sulfur range (as shown in the table below).
- Each coal grade in each of the 39 coal supply regions has its own unique coal characteristics based on the 1999 EPA Utility Mercury ICR and Form 423 data. National average coal quality characteristics are shown in the next slide.
- Some coals from the DRB are not currently being mined or shipped.  In these cases, 1999 EPA Utility Mercury ICR or FERC from 423 data was not available and default assumptions were used to assign values to each coal.
- The average heat content of other coals in the appropriate state was used when 1999 EPA Utility Mercury ICR data for a specific coal grade was not available. If no Hg ICR data was available for any coal in a state, the national average heat content of the appropriate sulfur grade based on Hg ICR was used.
- Mercury and sulfur contents were assigned in the same way as heat content.

## Coal Quality Characteristics: National Averages

**Coal Rank**

## Coal Supply Curve Methodology – Flow Chart Block 4: Reserve Allocation

## Peer Review Charge, Question #6:  Are the reserves allocated to the various mine types reasonable? 

## Allocate Reserves to Mining Methods

- Coal reserves in DRB are allocated by state, mine type and by heat and sulfur contents.
- In order to develop the coal supply curves, the DRB reserves are further disaggregated along the following characteristics:
- Surface mines
- Overburden ratio
- Mine size
- Mining Method
- Underground mines
- Seam thickness
- Seam depth
- Mining method
- Applicable recent data were not available, so the reserve assignments to various mining methods was based on previous work performed by ICF Resources, Inc. for the Coal Electric Utility Model (CEUM).
-       **(See Appendix C for complete data on the assumed allocation between coal grades and mining methods in each of the 39 coal supply regions.)**

## Coal Mine Costing

## Peer Review Charge, Question #12:Were all key cost areas identified?

## Coal Mine Costing - Methodology Overview

- Coal supply curves are price-quantity relationships that represent the all-in-cost of producing coal and the amount of saleable coal available to be produced at that cost. Coal mine costing is the process of estimating the cost of extracting coal from the ground.
- This cost of extraction varies by several factors:
- Existing or a new mine
- Surface or an underground mine
- Mining method
- Surface mine – Dragline, Truck and Shovel, or Contour Strip
- Overburden ratio
- Size of the Mining Operation (by annual production capacity)
- Underground mine – Continuous Miner or Longwall
- Depth of entry
- Seam thickness
- Variation in regional/ state level costs
- Labor costs
- Tax rates
- Mine life
- In this analysis, it is assumed that coal quality (e.g. sulfur content) does not affect the cost of extraction.

## Coal Mine Costing - Methodology Overview (contd.)

- Prototype mines, which are based on mine costing models developed by the Bureau of Mines for its COALVAL 2.0 software, are identified based on mining method.
- In each coal supply region, coal reserves are allocated among mining methods / prototype mines.
- The prototype mine costing models are populated with the allocated coal reserves and the regional level labor costs and state tax rates to estimate their cost of production.
- For each coal grade in a coal supply region, all the coal reserves and the estimated costs were sorted from low to high cost to develop the coal supply curve.
- The cost of coal production is adjusted over time using coal mine productivity improvement assumptions that are presented in later slides.

## Bureau of Mines’ COALVAL 2.0

- Originally produced in 1993 by the Bureau of Mines, COALVAL 2.0 was a pre-feasibility mine costing tool intended to give an “order of magnitude” estimate of coal production costs.
- Using simple user inputs, COALVAL 2.0 provided a relatively easy to follow, itemized calculation of costs for a number of different surface and underground mining techniques.

## Coal Supply Curve Methodology – Flow Chart Block 5:  Coal Mine Cost Model

## Coal Mine Costing – Overview

- The cost of producing coal from reserves allocated to various prototype mines is estimated in the mine costing model.
- The cost of production, in CMCM, is regionalized based on state and regional data such as wages, taxes, royalties, etc.
- The CMCM in this analysis is based on COALVAL 2.0.  This model was enhanced based on updated data, flexibility and functionality.

## Coal Mine Costing Model (CMCM) - New Features

- CMCM updated scheduling assumptions where appropriate
- Truck and shovel equipment scheduling updated to reflect the number and type of machines appropriate to current mining scale and practices
- Day labor scheduling reassessed
- Added functionality: CMCM incorporates several new features:
- Enhanced methodology for capturing the cost of constructing shafts in deep underground mines: The Resource Allocation and Mine Costing (RAMC) model developed in 1983 for U.S. Department of Energy’s Energy Information Administration included a detailed methodology for costing mine depth differences in underground mines.  It was used in CMCM to extend COALVAL 2.0’s procedure for costing shaft or slope development to mines with depths of 400, 700, and 1,000 feet.
- Depreciation term (in number of hours) for each piece of equipment, which COALVAL  2.0 implemented as a fixed input assumption, was revised to consider how many days per year and shifts per day a piece of equipment is in service.  Specifically, the number of years equipment can be used decreases as intensity of use increases, and the intensity of use is now an input to the model.
- Ability to do mine costing for a large number of prototype mines simultaneously.

## CMCM Divides Costs Into Three Categories: Direct, Indirect, and Taxes and Royalties.

- Model structure does not require these categories, as every cost is calculated independently and added together, but categorization allows easier navigation/comprehension and presentation of the model.
- Direct Costs depend on the level of output and represent almost three quarters of the cost of production.
- Payroll, Overhead Burden, Fuel & Lubes, Explosives, Operating and Maintenance Supplies, Repair Parts, Utilities, Equipment Rental, Auto Expense (company cars for salaried employees), Professional Services, Reclamation Provision, Truck Haulage Cost, General Expenses, Hoisting Cost (for underground mines), Tipple Cost, Equipment Depreciation
- Indirect Costs are usually incurred at the same level without respect to output.
- Depletion, Development Amortization, Overhead, Insurance
- Taxes and Royalties include both state and federal and are differentiated by state and mine and coal type where applicable and represent almost a quarter of the total cost.
- Equipment Tax, Income Tax, Real And Tangible Property Tax, Black Lung, Reclamation, Employer Taxes and Employee Benefits, Royalties

## Assumptions Impacting Direct Costs

- Run of the mine assumptions, i.e.,
- Number of days of operation per year
- Number of shifts per day
- Production rate
- Preparation/Tipple/Loadout
- Coal seam characteristics
- Overburden ratio/Depth to seam
- Seam Thickness
- Mine characteristics
- Surface or Underground
- Size of the mine
- Location (covered in taxes)

## Cost Elements in Existing and New Mines

- New mines are differentiated by the applicable costs.
- Due to the long-term cost approach of CMCM, many costs, such as the equipment purchase costs for all equipment that is replaced over the life of the mine, are not considered sunk and so are borne by both new and existing mines.
- The costs that do not apply to existing mines are the costs of site development and building construction.

## Cost Elements in Existing and New Mines (contd.)

## Methodology

- Prototype mines are modeling constructs into which specific mine assumptions are implemented to yield a model mine.
- First, coal reserves are allocated to prototype mines in each coal supply region.
- Second,  wage, salary, and tax data, that are applicable in each specific state, are applied to each mine.
- Third, costs are calculated.
- The cost of producing coal from a model mine is based on the following key schedules:
- Production Scheduling
- Labor Scheduling
- Equipment Scheduling
- Mine Productivity

## Define Mine Prototypes

- Based on the mining method, the following prototype mine types were identified
- Dragline
- There are three prototype mines using draglines differentiated by the capacity of the dragline in the operation. Prototype mines have draglines with a 40, 80, and 120 cubic yard capacity, respectively.
- Overburden ratio is continuously variable within each prototype mine
- Truck & Shovel
- There are three mines using trucks and shovels differentiated by the capacity of the hydraulic shovel in operation. Prototype mines have hydraulic shovels with a 34, 44, and 56 cubic yard bucket, respectively.
- Overburden ratio is continuously variable within each prototype mine
- Contour
- Seam thickness of 12-36 and >36 inches
- Continuous miner
- Seam thickness of 24-42, 42-72, 72-96 and >96 inches
- Depths of 400, 700 and 1000 feet
- Longwall miner
- Seam thickness of 42-72, 72-96 and >96 inches
- Depths of 400, 700 and 1000 feet

## Production Scheduling

- The all in cost of coal, and the number of tons of coal a mine can produce are significantly affected by the number of hours the mine operates in a year.
- COALVAL 2.0 originally assumed a 5 day week with 2 shifts of 8 hours each per day.
- A review of major coal producing companies revealed that coal mines now operate 7 days a week with 3 shifts of 8 hours each, only shutting down operations for one or two days per year.
- CMCM assumes 365 days per year of operation with 3 shifts of 8 hours each to maximize coal production.
- Also, the more a mine operates, the less impact salaried employees, on-site buildings, and overhead in general have on the cost per ton of coal.
- Equipment costs per ton of coal are not reduced, as machinery’s usable life is specified in number of hours of operation.

## Labor Scheduling

- Labor scheduling refers to the full list of job titles necessary to operate a mine. Each of the job titles is assigned to one of 5 job classes.  For each mine technology, the number of employees that occupy a job for each shift is taken into account.  The number and type of salaried employees, such as a geologist and mine manager, are also taken into account and salaries are assigned specific to each job.
- The cost for each shift for each job title for each mine technology is calculated in one place, allowing shift sizes, total employment, and the cost of labor to be easily viewed and changed for each mine technology.
- Overtime rates and totals are also included, depending on the number of hours per year each employee is assumed to work.
- In CMCM’s current form, all model mines of a specific mining method use the same labor scheduling.  No variation from region to region, except for wage rates, currently exists.
**	****See Appendix H for complete data on Labor and Equipment scheduling assumptions**

## Equipment Scheduling

- Equipment scheduling refers to the full list of machinery required to operate the mine, including coal extraction equipment, trucks for transporting the coal to the processing point, maintenance vehicles, etc.
- In CMCM’s current form, all model mines of a specific technology use the same equipment scheduling.  No variation from region to region currently exists.
**      ****(An electronic copy of the Coal Mine Costing Model (CMCM) is provided in Appendix G3.)**

## Mine Productivity

- CMCM is used to generate a set of coal supply curves reflecting the year 2001.
- For developing coal supply curves for years after 2001 we propose to use assumptions in regards to improvements in coal mine productivity.
- Mine productivity incorporates both the labor and equipment productivity and is assumed to track labor productivity. Mine productivity improvements are used to capture changes in the cost of coal production over time. Productivity varies across regions due to the different distribution of mine types in each region.
- The CMCM labor/mine productivity assumptions were obtained from AEO 2003*.*
- This publication includes separate estimates of productivity improvement data for each coal supply region reported in it (Northern Appalachia, Powder and Green Rivers, etc.), as well as annual forecast rates for those regions out to 2025.
- For the years beyond 2025, CMCM holds the forecast 2025 rate constant.
**	****(See Appendix K for complete data on the productivity per miner hour and productivity improvements over time.)**

## Saleable Coal

- The amount of saleable coal is less than the amount of coal mined due to losses from washing/preparation, which can range from simple breaking of the coal to washing of the coal to reduce the sulfur content
- In the case that the reserves allocated to a mine exceed the amount of production that will take place at the mine over the life of the mine (15 years for surface, 30 years for underground), CMCM increases the number of mines of that type to consume all reserves.
- A higher overburden ratio reduces the amount of saleable coal by increasing the time that equipment must be used to remove overburden.
- CMCM determines the amount of coal produced by using the overburden ratio as an input.
- CMCM automatically adjusts the amount of coal mined for the assumed overburden ratio.  This is based on the assumption that a mine, based on its equipment configuration, can only extract a fixed amount of material (rock and coal).  A higher overburden ratio implies more rock and less coal.
**      ****(A printed and electronic copy of the Coal Mine Costing Model (CMCM) is provided in Appendix G.)**

## Prototype Coal Mine Models

## Peer Review Charge, Question #12 – 14:Were all necessary mine prototypes included?Were assumptions, data, and methodologies used to tabulate the costs appropriate?

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Surface Mine: Dragline

- The dragline model consists of one dragline (for the entire life of the mine) used to create a pile of coal that is then loaded onto haulage trucks by small hydraulic shovels.
- A dragline is an excavating machine using a bucket suspended from cables attached to a boom. The bucket is dragged along scooping up the overburden and coal. Draglines are immense machines with cabs as big as houses, 100 yard long booms, and 160 cubic yard buckets.
- The CMCM model for dragline mines is driven by the capital and operating costs of the dragline but also includes full specifications for haulage trucks (for getting coal from the mining point to the preparation/tipple point), maintenance vehicles, administration facilities, and a full complement of employees.
- As the amount of overburden increases, the ratio of resources (mostly time, explosives, and cost) needed for removing it increases, decreasing the ratio of saleable coal produced by the operation.
- Different dragline sizes, in terms of the cubic yards held by the bucket, and in the size of haul trucks can vastly affect production, both in total and relative costs.
- Production rates are based on COALVAL 2.0: 56,538 tons per shift for large draglines, 37,692 tons per shift for medium, and 18,846 tons per shift for small draglines. These production rates are based on 1994 data and were adjusted upwards to capture the increase in labor productivity over the 1994-2001 period based on Coal Industry Annual 2000.
- 	**(For detailed data on the labor and equipment scheduling assumptions for dragline mines, see Appendix H1.)**

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Surface Mine : Truck and Shovel

- The truck and shovel model is characterized by the use of hydraulic shovels used to fill haulage trucks with coal.
- Hydraulic Shovels are large machines that have buckets as large as 60 cubic yards on the end of a crane boom.
- The most significant truck and shovel coal mines are found in the Rocky Mountain supply regions, but CMCM allows them throughout the United States.
- As the amount of overburden increases, the ratio of resources (mostly time, explosives, and cost) needed for removing it increases, decreasing the ratio of saleable coal produced by the operation.
- Different shovel sizes, in terms of the cubic yards held by the bucket, and in the size of haul trucks can vastly affect production, both in total and relative costs.
- Production rates are based on COALVAL 2.0: 23,078 tons per shift for large mines, 9,616 tons per shift for medium, and 4,808 tons per shift for small mines. These production rates are based on 1994 data and were adjusted upwards to capture the increase in labor productivity over the 1994-2001 period based on Coal Industry Annual 2000.
**      ****(For detailed data on the labor and equipment scheduling assumptions for truck and shovel mines, see Appendix H2.)**

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Surface Mine : Contour Strip

- In Contour Strip Mining coal is extracted from a steep hillside, using an auger, steam shovel, or (if the seam maintains the same horizontal elevation relative to the surface) a continuous miner.
- Contour Strip mines are found primarily in the Appalachian regions, though seams appropriate to this technique exist throughout the U.S.
- The productivity of equipment varies for different coal seam thicknesses.  To accommodate this, CMCM uses two separate Contour Prototype Mines, one for seams that are from 12 to 36” and one for seams thicker than 36”
- Production rates are based on COALVAL 2.0: 6,500 tons per shift for seams greater than 36 inches thick, and 5,200 tons per shift for seams 12 to 36 inches thick. These production rates are based on 1994 data and were adjusted upwards to capture the increase in labor productivity over the 1994-2001 period based on Coal Industry Annual 2000.
**      ****(For detailed data on the labor and equipment scheduling assumptions for contour strip mines, see Appendix H3.)**

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Surface Mine : Mountain Top Removal

- There has been significant litigation in regards to the mountain top removal method of extracting coal.
- Due to the protracted uncertainties associated with the acceptance of this mining technique, it has not been included in CMCM.
- In the future, Mountain Top Removal could be added to CMCM if coal supply fundamentals again support it, though coal reserves within West Virginia and eastern Kentucky will have to be reallocated to accommodate this.

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Underground Mine: Continuous Miner

- The continuous underground mine uses one continuous miner and rail car system to haul coal to the mine shaft.
- A Continuous Miner mine is a room-and-pillar mine, in which a series of rooms are cut into the coal bed and pillars of coal are left for support.  The coal is cut by a machine using a rotating cylinder studded with tungsten carbide bits, then loaded onto shuttle cars and carried to the tipple where it is loaded for shipment.  From 50% to 70% of the coal may be removed from a seam with this method.  The remainder is left as pillars, supporting the rooms of the mine.
- Mines using the continuous method are found all over the United States, as up front capital costs are much lower than longwall operations and viable underground coal seams appear in all coal supply regions.
- The design and cost of a continuous miner changes as the thickness of the coal seam increases.  As such, CMCM uses four separate prototype mines (24 – 42”, 42 – 72”, 72 – 96”, and >96”) to capture the cost differences between coal seams.
- Since coal seams occur at different depths, each of the four Prototype Continuous Mines can be implemented at either 400, 700, or 1000 feet deep, with different mine designs and costs for each.  Costs are accounted for through different capital costs and different costs to bring the coal to the surface of the mine for preparation and loadout.
- Production rates are based on COALVAL 2.0: 839 tons per shift for seams greater than 96 inches, 654 tons per shift for seams between 72 and 96 inches, 516  tons per shift for seams 42 to 72 inches, and 394 tons per shift for seams 24 to 42 inches.** **These production rates are based on 1994 data and were adjusted upwards to capture the increase in labor productivity over the 1994-2001 period based on Coal Industry Annual 2000.
**      ****(For detailed data on the labor and equipment scheduling assumptions for the continuous miner, see Appendix H4.)**

## Coal Mine Costing Model (CMCM) AssumptionsPrototype Underground Mine : Longwall Miner

- The longwall mining prototype mine uses one longwall machine for the majority of coal extraction, but also two continuous miners that prepare the mine segments for the longwall miner.
- A Longwall Miner removes coal with a tungsten carbide bit studded cylinder with steel roof supports holding up the roof in the immediate working area.  As the machine advances, the roof is left to safely collapse.  Nearly 80% of coal can be removed using this method, as only the area around the shaft and the rooms leading to the machine require pillars of coal to be left for support.
- Mines using the longwall method are found all over the United States, although in fewer numbers than mines using continuous miners.  Viable coal seams appear in all coal supply regions.
- As with the Continuous Miner Prototype Mine, a Longwall Continuous Mine uses different machinery, which has different costs, for coal seams of varying thickness. Three prototype mines were created to capture this detail (42 – 72”, 72 – 96”, and >96”).
- Since coal seams occur at different depths, each of the three Prototype Longwall Mines can be implemented at either 400, 700, or 1000 feet deep, with different mine designs and costs for each.  Costs are accounted for through different capital costs and different costs to bring the coal to the surface of the mine for preparation and loadout.
- Production rates are based on COALVAL 2.0: 4,246 tons per shift for seams greater than 96 inches, 2,974 tons per shift for seams between 72 and 96 inches, and 2,018 tons per shift for seams 42 to 72 inches. These production rates are based on 1994 data and were adjusted upwards to capture the increase in labor productivity over the 1994-2001 period based on Coal Industry Annual 2000.
**      ****(For detailed data on the labor and equipment scheduling assumptions for the longwall miner, see Appendix H5.)**

## Coal Mining Methods Not Included in CMCM

- Auger mining, typically used in small eastern surface mines produces very little coal and so has been omitted from CMCM for simplicity.
- Due to the heavy controversy in regards to the mountain top removal method,  Mountain Top Removal option has not been activated in the CMCM.  Should this mining technique become relevant, the CMCM framework will accept the new technology specification with a minimum of effort.

## Coal Supply Curve Methodology – Flow Chart Block 6:  State Level Data

## Costing Data Sources - Western Mine Engineering, Inc. 

- Three databases produced by Western Mine Engineering, Inc. were used to determine equipment, labor, and production costs and capabilities for various mine types:
- Mine Costing Service
- Mine and Mill Equipment Costs:  An Estimator’s Guide
- U.S. Coal Mine Salaries, Wages, and Benefits: 2002 Survey Results
- Western Mine Engineering, Inc reports provide the necessary building blocks for costing a coal mine, including data on:
- Equipment costs (including rates of fuel use, maintenance costs per hour, and usable lives)
- Labor rates by state, employment class and union classification
- All relevant taxes by state

## Labor Costs - Wage Rates

- Wages were determined from Western Mine Engineering, Inc.’s *U.S. Coal Mine Salaries, Wages, and Benefits: 2002 Survey Results*, which provided wages for different job titles for 18 underground and 27 surface mines in various states.
- Each mine was assigned to one of three groups and one of 12 regions as shown below:
- East:	Northern Appalachia, Southern Appalachia, Central Appalachia
- Central:	East Interior, West Interior, Dakota Lignite, Gulf Lignite
- West:	Powder and Green River Basins, Rocky Mountains, Southwest, and Northwest.
- The wage rate for each labor grade in each region was determined by averaging all applicable survey mines of that type (surface or underground).
- In the case where no rate base existed for a specific region and type, the average of the other regions in that group was used.
- Regions were then mapped to the 39 coal supply regions, allowing different wage rates for each model mine.
- For modeling purposes, all labor job titles were divided into five grades for each underground and surface mine. This is in keeping with COALVAL 2.0, which was the basis for the mine costing modeling performed here.

## Labor Costs - Manager Salaries

- Western Mine Engineering Inc.’s *U.S. Coal Mine Salaries, Wages, and Benefits: 2002 Survey Results*, also provided salary data for managerial positions.
- Managerial job titles from the COALVAL 2.0 model were used, and then Western Mine Engineering, Inc.’s salary data were mapped to the COALVAL 2.0 job titles.
- The managerial salary data for the 18 underground and 27 surface mines (that were also used in the wage calculations) were not differentiated by mine but averages for each of four groups of regions, i.e., East, Central, Northwest, and Southwest were provided. Hence, we mapped the coal supply regions to one of these four regions.
- Each IPM coal supply region was then assigned to one of these four regions, allowing each model mine to use the appropriate salary data.
**(See Appendix D for a detailed presentation of the wage and salary data.)**

## Taxes and Royalties

- The cost of mining operations is affected by several federal taxes and costs:
- Federal royalties add 12.5% of production costs for surface mines and 8% of production costs for underground mines.
- Federal Income Taxes of 35%.
- Standard federal unemployment tax rate of 0.80% of wages applies.
- Reclamation taxes cost $0.35/ton of coal for surface, $0.15/ton of coal for underground, and $0.10/ton of coal for lignite, which applies to payments to the “Abandoned Mine Land Reclamation Trust Fund,” not to reclamation of the property.
- Black Lung taxes add $0.55/ton of coal for surface mines and $1.10/ton of coal for underground mines. However, if the tax exceeds  4.4% of production costs, the charge is 4.4%.
**(See Appendix E for a detailed presentation of tax assumptions.)**

## Coal Mining Incentives Provided by States

- Tax incentive programs for coal mines, or for businesses using coal mined in-state have been identified in Illinois, Indiana, Maryland, Montana, and Virginia:
- In Illinois, new electric facilities of at least 400 Megawatts that use coal, or gases derived from coal and create or revive at least 150 coal-mining jobs are eligible for grants to build capital facilities of up to $100 million over a 25-year period (and a total of $500 million for the whole program).
- In Indiana, a center for coal technology research has been founded, but not funded.
- In Maryland, a tax credit toward corporate income tax, personal income tax or public service company franchise tax may be taken for purchases of coal mined within the state.
- In Montana, mines producing less than 50,000 tons of coal per year are exempt from severance taxes.
- In Virginia, tax credits for ownership interests in coal mines for the years 1996 – 2008 are available.
- The draft coal supply curves do not incorporate the above incentives due to implementation reasons.

## Coal Supply Curve Methodology – Flow Chart Block 7: Mining Equipment Data

## Mining Equipment Costs

- The cost for purchasing each piece of equipment, hourly fuel, operation, and maintenance costs as well as usable life are all taken into account  for each mine technology.
- Equipment purchase, operating, fuel, and maintenance costs were obtained from Western Engineering, Inc.’s
- Mine Costing Service
- Mine and Mill Equipment Cost publication
- Hoisting costs (bringing coal mined underground to the surface) are standard for all underground mines.  Model mines developed for these coal supply curves have 3 possible depths: 400 ft., 700 ft., and 1000 ft.
**(See Appendix F for detailed data on the equipment costs used in this project.)**

## Coal Supply Curve Methodology – Flow Chart Block 8: Miscellaneous Costs

## Miscellaneous Costs 

- The following cost components are based on COALVAL 2.0:
- Explosives costs apply only to surface mines for the loosening of overburden material at the rate of $0.19 per cubic yard for Truck & Shovel and Dragline mines and $0.15 for Contour Strip mines.
- Tipple/Loadout costs are assumed to be $1.24 per ton for all mines.
- Truck Haulage cost (from the point of mining to the prep/tipple point) is assumed to be $0.17 per ton.
- Reclamation Costs separate from reclamation taxes still apply and are calculated at $0.507per ton for surface mines and $0.07 per ton for underground mines.
- Depletion Costs are calculated at $0.68 for underground mines and $0.11 for surface mines.
- Property Insurance is calculated at $0.30 per $100 of value.
- Auto Expenses for salaried employees with this benefit are $865 per vehicle per month while and Maintenance Truck Rental for (surface mines only) are $1,155 per vehicle per month.
- Coal washing and preparation costs are assumed to be $3.25 per ton for contour strip, continuous miner, and longwall miner mines and $3.33 for dragline and truck & shovel mines.
- Data on the number and type of equipment.

## Cost Components for Sample Mines

## Comparison of Cost Share by Cost Type for Underground Mine Types

- Direct costs, indirect costs and taxes & royalties account for approximately 78%, 6% and 16% of the total cost of production, respectively.

## Comparison of Cost Share by Cost Type for Surface Mine Types

- Direct costs, indirect costs and taxes & royalties account for approximately 78%, 1% and 21% of the total cost of production, respectively.

## Comparison of Cost Share by Cost Type for Various Mine Types

- Appendix G summarizes the cost components for all relevant categories for selected prototype mines presented in the previous two charts.

## Other Issues

## Coal Resource Depletion

- Because the reserves allocated to a mine are finite, it is conceivable that some of the mines will run out of coal during the modeling time horizon.
- Due to the availability of model mine level coal reserve data, the gradual depletion of reserves at each step of each coal supply curve can be modeled such that the cumulative extraction of coal from a given mine is limited by the maximum total amount of exploitable coal reserves in the mine.
- This functionality can be modeled in IPM. This will significantly improve the quality of coal markets modeling in IPM.

## Imported Coal

- CMCM uses 2000 EIA Coal Industry Annual data to set the amount of imported coal delivered to the United States, and the average price of those deliveries.
- 1999 EPA Utility Mercury ICR data is used to determine the ratio of each coal grade to the total imported from each country. For the coal supply curves representing imported coal, we have picked only those grades that include the most imports. Each country is assumed to be a coal supply region.
- Only imported coal for which all data was available is included below, leaving out approximately 200,000 short tons of imported coal.
- The 2000 EIA Coal Industry Annual level of imported coal is held constant over the time horizon of CMCM.

| Coal Supply Curves – Imported Coal |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
| Country | Coal Grade | SO2 Content (lbs/MMBtu) | Mercury Content (lbs/Tbtu) | Annual Availability (Million Tons) | Average Price ($/Ton) |
| Colombia | BB | 1.02 | 7.17 | 7.6 | 26.3 |
|  |  |  |  |  |  |
| Venezuela | BB | 1.03 | 5.16 | 2.0 | 30.6 |
|  |  |  |  |  |  |
| Indonesia | SA | 0.45 | 3.9 | 0.7 | 43.4 |
| Compiled from Table 35. of 2000 EIA Coal Industry Annual |  |  |  |  |  |

## Coal Exports

- The 2000 EIA Coal Industry Annual provides data on the amount of coal exported from the United States as well as the customs district through which the coal ships.
- The amount of U.S. coal exports is less today than it has been during all of the 1990s, which saw the amount of exports shrinking in each year.
- Over half (33 million tons out of 58.5 million tons) of exports are for metallurgical, not steam coal.
- Coal quality characteristics of export coal are not available.
- Given that steam coal exports make up less than 3% of steam coal production and the ambiguity of the data, exports will not be explicitly modeled.

## Non-Electric Sector Coal Use

- Since the CMCM supply curves will be used in an electric sector only model (IPM), separate estimates of non-electric sector coal use are needed in order to obtain total coal demand to use in deriving coal prices from the supply curves.
- The 2000 EIA Coal Industry Annual (CIA 2000) provides data on the amount of coal used in the industrial sector, the commercial and residential sectors, the electric sector, and coal carbonized at coke plants.
- The data is presented by state and census division but the nature of the data prevents the EIA from publishing data when it may reveal confidential business information, leaving gaps in the state-level data.
- The sum of these data equals the total coal used, which is also published in the CIA.
- The level of non-electric sector coal use provided in the CIA 2000 is held constant over the time horizon of CMCM.
- Using the census division data to create either hypothetical IPM plants that represent industrial uses of coal or coal contracts in each census division will accurately capture the consumption of coal from non-electric users.
- Some census division level data is also withheld.
- Using the total and electric sector use, it is possible to calculate the aggregate tonnage of non-electric coal use for all census divisions.

## Coal Use by Census Division and Sector

## K – Fuels

- Development of the K – Fuels process was originally intended to upgrade the heat content of low rank coals (especially Powder River Basin coals) by removing water and ash.
- Experimental data suggests that an 8,000 Btu/pound western coal can be upgraded to over 11,000 Btu/pound.
- As a byproduct of the process, up to 70% of the mercury content of the coal is also removed.
- A feasibility study shows that an F.O.B. price of greater than $28.00/ton has a market potential of over 200 million tons per year.
- The study showed that K – Fuels are most economic on uncontrolled (no post combustion equipment) coal plants.
- Financing for the first K – Fuels production facility was secured in April of 2003.  The facility will have a capacity of 700,000 tons per year.
- K – Fuels can be implemented as an additional coal grade, though reserves would have to be allocated to it. In addition, the cost of producing this grade has to be precisely estimated. The draft coal supply curves do not include K- Fuels.

## Outstanding Issues and Next Steps

## Peer Review Charge, Question #15:Do any of the following represent serious drawbacks and, if so, how can they be addressed?

## Data Issues

- Recent data on the cost of loading coal onto rail cars (or barges or trucks) was not available.
- Recent data on the costs and methods of coal preparation (breaking, cleaning, etc.) was not available.
- The cost of reclaiming closed surface mines is part of the all in cost of coal production but is hard to generalize, though a basic cost per ton of coal mined is employed by CMCM.  (Note: This cost is not the same as the reclamation tax that goes into a trust fund to reclaim abandoned coal mines.  The reclamation tax is currently factored into the costs used in CMCM.)

## Methodological Issues

- Allocating coal reserves to prototype mine models is based on data that ICF developed in the early 1990's as no other data was available.
- Labor scheduling, if changed in the model to a 4-on and 4-off work schedule with extra crews, would eliminate overtime costs currently charged to the model mines.
- In addition to the costs of coal preparation and washing, recent and relevant information on the impacts (reduced delivered sulfur content) of this process was not available.
- Reserve depletion can be modeled endogenously within IPM. The cumulative amount of coal that can be produced at any step of the coal supply curve over the model time horizon will be limited by the reserves allocated to that step.
- Only straight line depreciation and capital replacement is included in the model at this time.  Cost of capital, in terms of debt and equity rates, is not included.

## Next Steps

- Continue researching the availability of more recent coal preparation and washing costs, yields and rail loadout at a coal supply region level.
- Continue researching the availability of more recent data on allocation of coal reserves to prototype mines.
- Incorporating the cost of capital for capital costs through a capital charge rate construct.
- Improving representation of non electric sector coal use in IPM by having it change over time. EIA’s Annual Energy Outlook might be a potential source for obtaining that data.

## Draft Supply Curves

## Coal Supply Curve Methodology – Flow Chart Block 9:  Coal Supply Curves

## Peer Review Charge Questions #16 – 17:Do the supply curves appear reasonable?  If not, why?  Do these coal supply curves adequately capture the true nature of long term coal purchasing?

## Coal Supply Curves

- The Coal Mine Costing Model generates the cost of production for each set of coal reserves allocated to different prototype mines.
- Reserves allocated to each prototype mine form a step in the supply curve.
- The sorting of the costs of production from all steps for each coal grade in a supply region results in a supply curve.
- There are a total of 170 coal supply curves.
**(See Appendix J for detailed data the resultant coal supply curves.)**