Dirty U.S. coal finds a home in Europe

Low Cost Outweighs High Sulfur Content as Exports to Continent Surge

DRAX, England—Even as it faces increased regulatory scrutiny at home, America's dirty and unwanted coal is being embraced in one of the world's cleanest energy markets: the European Union.

At the biggest power plant in the U.K., operated by Drax Group DRX.LN +0.15% PLC, a small black mountain of a million tons of coal sits at the base of a dozen 374-foot cooling towers.

Much of it is high-sulfur coal from under the plains of Illinois and Indiana—exactly the kind of high-emission, power-plant fuel receiving closer scrutiny from U.S. regulators and courts. Last week, the Supreme Court ruled in favor of enforcing regulations that require power plants in 28 states to cut coal emissions that blow across state lines.

Many U.S. power plants were already reducing emissions in anticipation of tougher Environmental Protection Agency rules that take effect in 2015. Now, the Supreme Court ruling could affect 1,000 power plants in the eastern U.S. that might need to install additional pollution controls or cut back on coal consumption.

These are tough times for the global coal industry, which has been battered in recent years by regulations, the U.S. boom in extracting gas from shale-rock formations, and lower prices caused by softening demand from China. Coal now generates about 39% of electric power in the U.S., off from 55% in 1990.

Low domestic demand has renewed the focus on U.S. exports, which are on track for a record-setting third straight year of more than 100 million tons. The 28-nation EU imported 47.2 million tons of U.S. coal last year, up from 13.6 million tons in 2003. Exports to the U.K. alone are up tenfold in the same period. The U.S. ranked second only to Russia in supplying Europe with coal last year, and the U.S. could further increase its market share if recent political tensions with Moscow disrupt Russian shipments.

Germany's decision to phase out of nuclear power after the 2011 Fukushima nuclear disaster in Japan has also made it a significant buyer of U.S. coal, mostly because the commodity is so inexpensive.

"Before the financial crisis, Europe was happy to favor the environment, but when the economy started not doing well, they weren't quite ready to accept the high power price," so energy consumers returned to coal, says Daniel Rohr, an analyst for Morningstar Inc.

U.S. coal shipments to Europe are on the rise. One of the biggest U.S. coal-export terminals is operated by Consol Energy in Baltimore. Greg Kahn for The Wall Street Journal

Since 2003, German imports of U.S. coal have risen to more than 15 million tons from under a million tons. A spokesman for E.ON EOAN.XE +1.07% SE, Germany's largest power and natural-gas utility, says it now purchases more than four million tons of coal a year, or 17% of its total, from the U.S., up from 800,000 tons in 2010. E.ON operates power plants in several European countries.

Although sales have tapered off in recent weeks because of higher inventory levels, the U.S. coal industry expects the EU to be a good long-term bet. Several U.S. mining companies, including Foresight Energy LLC and Arch Coal Inc., ACI -0.79% recently opened new sales offices on the Continent.

The big gainer—accounting for roughly one-third of U.S. exports, up from almost nothing 10 years ago—has been high-sulfur coal taken from thick coal seams in Illinois and Indiana. It is loaded onto barges and shipped 800 miles down the Mississippi River to a terminal on the Gulf of Mexico. From there, it heads across the Atlantic to people like Dave Docker, head of fuel procurement at Drax, who buys nine million tons of coal a year on global markets.

Mr. Docker says the Illinois and Indiana coal, shunned in some places in the U.S. because of its high sulfur content, offers a less-expensive alternative than coal from nearby European mines—even including transportation costs.

Phil Gonet, president of the Illinois Coal Association, says geography helps keep prices low. "Our coal is easy to extract and we're right next door to two rivers that can take the coal to anywhere in the world," he says, referring to the Mississippi and Ohio rivers. Mr. Gonet argues that Illinois Basin coal is a viable, cost-effective fuel alternative given new scrubbing technology that removes sulfur from power-plant emissions.

The Illinois Basin—located in Illinois, Indiana and parts of Kentucky—possesses some of the world's richest coal seams, but high sulfur and ash content caused the coal to be shunned after the passage of the Clean Air Act in 1970. By 2002, mining in Illinois reached its lowest levels since the Great Depression.

That is when a handful of companies, led largely by two private operators, Chris Cline and Robert Murray, snapped up mines on the cheap. The acquirers, bet—correctly, it turned out—on scrubbing technology that can remove almost all the sulfur. They also counted on the coal appetite of export markets such as the U.K.

Mr. Cline's Foresight Energy—Drax's top U.S. supplier—last year offered its coal for as little as $65 a ton in Europe, including freight, compared with $80 a ton from U.K. mines near the Drax power plant.

For Mr. Docker, the coal's low cost is a saving grace. He has made enough other improvements to plant operations—in particular, new technology to remove sulfur better—to allow Drax to burn cheap dirty coal and still comply with strict EU laws.

The Drax power plant was built in northern England in the 1970s, following the conventional model of building power plants next to coal mines. Coal was basically shoveled straight from the mine. Next to hangars housing the six boilers and 30 turbines that generate electricity are a five-week supply of coal, as well as little green hills. The hills, say Drax officials, are actually piles of ash waste that are ideal for growing grass and hedges.

In 2005, EU regulators set up rules that fixed Drax's sulfur-emissions quota at 33,000 tons a year. Drax, which bought almost all of its coal from local mines, began importing cleaner coal from Russia and Colombia that contains less than 1% sulfur, compared with the 2.5%-3% sulfur content of Illinois Basin coal.

At the same time, Drax also started burning dried vegetation that emits almost no sulfur and reduced the amount of coal needed. One of Drax's six boilers now burns biomass, or compressed plant and wood material, much of it imported from the U.S. The plan is to convert two more of the boilers to biomass fuel by 2020.

Drax was emitting less than the allotted 33,000 tons of sulfur by using the cleaner Russian and Colombian coal and the biomass, giving Mr. Docker an opportunity to burn dirtier coal. "I have headroom now to emit more sulfur, and that can be filled with Illinois Basin [coal]," he says. His engineers would prefer Appalachian coal, which is cleaner, burns more efficiently and doesn't impose as much wear and tear on the boilers. "But it's too expensive," Mr. Docker says. Appalachian coal typically sells for 20% more than Illinois Basin coal.

The use of high-sulfur Illinois Basin coal in Europe is disrupting the plans of policy makers hoping to wean the EU off dirty fuel sources, and has angered environmentalists who contend its high sulfur content damages the environment, despite power plants now using scrubbers to remove more than 90% of the sulfur. Imports have also brought high-cost coal mines in Germany, Poland and the U.K. to the brink of closure. U.K. coal output fell 24% last year to 13 million tons.

Tara Connolly, a Greenpeace activist in Brussels, says dirty coal shouldn't be burned no matter how cheap it is and that quotas simply give companies permission to continue polluting, just not as much.

Quotas have allowed the U.S. "to export its emissions to Europe," Ms. Connolly says. She says that a better approach would be an outright ban of dirty coal in favor of alternative clean-energy sources such as wind, solar and biomass.

"We want to end the Age of Coal," she says.

EU officials are aware of the rise in high-sulfur Illinois Basin coal imports and are concerned, says Joe Hennon, a spokesman for the European Commission, the EU's executive arm. "We've seen the increase in shale gas in the U.S. and more U.S. coal coming to Europe," he says.

Many EU countries are in violation of the bloc's emissions rules, and 19 have been subject to formal complaints from the European Commission. Drax and the U.K. haven't faced any complaints, Mr. Hennon says.

The EU is studying possible new rules governing emissions from coal-fired power plants.