Mr. Joseph (ioitan

Senior Counsel

O1’lice olAii’ and Radiation

U . S . Environmental Protection Agency

1200 Pennsylvania Avenue, NW.

Washington, D.C. 20460

I)ear Joe:

1Thanks to you and your colleagues at the agency for a very productive meeting. As I hope was

evident, Arch values the role ofthe EPA, and shares the agency’s commitment to continuous

111 provenient i ii eiiv ironmental performance.

To keep the exchange of information flowing, I thought I would use this letter to expand upon

some ofthe topics we discussed during that meeting. Naturally, we would welcome the opportunity to

further explore these and other issues at a time that proves convenient.

As you will recall, we spent a significant amount oftirne discussing the wave ofcoal plant

retirements now under way here in the U.S. As indicated, Arch has a talented market analysis team that

spends much of its time studying power market trends. Based on our forecasts, we expect nearly 60

gigawatts ofcoal-based capacity — orjust under 20 percent ofthe coal fleet — to retire by the end of2Ol 7.

To be clear, this total reflects the impact ofalready promulgated regulations — and assumes a fairly benign

existing source standard for GHGs.

The retirement ofso much capacity in such a short period oftime would be unprecedented.

Based on EIA data sources, it appears that there has never been a year prior to this decade when coalbased generation contracted by more than a single percentage point. Just as importantly, the HA does not

anticipate that other types ofgenerating capacity will step into the breach — at least not initially. EIA

projects that only I I net gigawatts ofnatural gas capacity will he added during that time frame — suggesting a reduction in overall fossil fuel capacity ofnearly 50 gigawatts.

Ofcourse, we could see a more rapid build-out ofnew natural gas capacity than is currently

projected, assuming public utility commissions prove more supportive ofrate recovery requests for new

capital than they have in the recent past. But even a more rapid natural gas build-out would carry risk, in

the form ofpipeline deliverability challenges, increased price volatility, and potential supply shortfalls incritical end-use markets like home heating.

Arch Coal, Inc.

One CityPtace Drive, Suite 300

St. Louis, Missouri 634i

main: 314.994.2700

fax: 314.994.2880

,

archcoal.com
It’s also important to note that the current coal plant retirement cycle is just getting under way.

ofthe expected 60 gigawatts of retirements referenced above, we estimate that only about 30 percent — or

I 8 gigawatts — has occurred to date. That means that the system will experience another 40 gigawatts or

so ofclosures over the course ofthe next four years. That is lightning speed where energy markets are

concerned, and leaves little time for course corrections.

Moreover, we believe that even the I 8 gigawatts ofclosures experienced since 2O 1 are stressing

the system to some degree — despite the fact that the first plants to shutter have tended to be the oldest and

most under-utilized. To date this winter, when measured by so-called “heating degree days,” the U.S. has

experienced temperatures approximately I 0 percent colder than the 1 0-year average. So, it’s been cold,

but not remarkably so — and not everywhere at once. Yet the resulting bump in energy demand has led to

significant disruptions — with power prices spiking above $1000 per megawatt-hour in certain areas and

natural gas prices rising to $100 per million Btu’s at certain city gates. Granted, these spikes have beengenerally short in duration, but energy prices remain elevated even now, and winter still has several

weeks to run.

The question, ofcourse, is what might happen ifa similar “polar vortex” — or, conversely, a heat

wave — were to make an appearance in 2017, after all 60 gigawatts have gone offline? And what if the

economy is growing at a more robust pace at that time? AEP may have provided some insight when theyannounced to investors that 89 percent ofthe 7 gigawatts slated for retirement within their own system

was needed and operating during the recent cold snap. Some ofour other customers are reporting similar

experiences.

In light ofthis analysis, we believe that an existing source standard that could spur additional coal

plant closures would be risky — and unnecessary. In the past five years, U.S. thermal coal consumption

has declined by more than I 80 million tons, driving a 1 6-percent reduction in GHG emissions from the

power sector. The near-certain retirement cycle now under way will lock in those gains and could deliverstill further reductions — particularly ifnatural gas prices remain low and stable. (Ifthey don’t, all parties

will be pleased to have as much coal-based capacity still operating as possible.)

So, what’s the right course for a reasonable 1 1 1(d) standard? Again, we believe the top priority

should be to avoid touching offthat next tranche ofcoal plant retirements before the current one has run

its course. Ifnothing else, there needs to be sufficient time to see how power markets will react to such a

transformational change to the grid — and we simply won’t know that until the latter years ofthis decade

at the earliest. Instead, we would counsel that the agency seek to set standards that focus exclusively on

wringing out efficiency improvements from theexisting fleet, while avoiding the risk of additionalclosures. In our view, EPA will have many opportunities to set more ambitious standards in the future.

Consequently, we don’t believe there is a sound policy rationale for doing so now, given a rapidly

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technologies by the early 2030s, the cost ofstabilizing GHG concentrations in the atmosphere by midcentury will increase by $1 trillion. Needless to say, that would make a heavy lift heavier still. We firmly

believe that maintaining a significant and stable role for coal here in the U.S. will prove more supportive

oftechnological investment and progress than the alternative. In short, we must address carbon emissions

ill the developing world ifwe are to address them at all — and the U.S. can and should be helping to drive

tile advances that will make such progress possible.

Again, thank you for a productive meeting, and for the opportunity to share these further

thoughts. We are currently taking a deeper look at the coal fleet, including a more detailed assessment oftile coal plants that have already closed, the coal plants expected to close by 20 1 7, and the coal plants

most likely to close in a theoretical next round ofretirements. We hope to share that analysis with you at

a time that proves convenient.

Sincerely,

Deck Slone

Cc: Lisa Feldt

Elliott Laws

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