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Another Assault on Coal, Another Push to Natural Gas

by | published March 18th, 2011

This week, the Environmental Protection Agency (EPA) again gave notice that it intends to curb non-carbon emissions at U.S. power plants.

I addressed these new rules five months ago in “Two Non-Carbon Regulations About to Rock the Coal Sector,” October 29, 2010 – well before the EPA made its public move. As I said at the time, my contacts in the power generation sector considered these non-carbon developments far more serious than limits on carbon emissions.

At the center of the storm are substantial reductions in mercury, sulfurous, and nitrous oxide emissions.

Coal as a fuel is again coming under attack in the U.S.

The move has hardly caught the industry unaware. Larger utilities have been reducing this kind of environmentally hazardous polluting for some time now.

What is now facing coal-fired plants, however, is the prospect of either retrofitting existing facilities with counter-measures… or closing them entirely.

There will certainly be some concerted conversations about the time scale. But nobody in the coal sector seriously disputes the validity of the pollution findings or, for that matter, the necessity of the adjustments.

As this tug of war continues, meanwhile, the progressive move to cleaner-burning natural gas as the primary source for electricity production continues to intensify.

Let’s take a look at why.

The Current Situation

About half of the nation’s electricity comes from more than 400 coal-fired plants spread across 46 states.

According to the EPA, about 44% of the coal-fired plants in the country currently have no pollution control equipment. That results in about 380,000 tons of these pollutants spewing from the plants annually.

Mercury emissions tend to localize heavily where the coal-fired plants are most dominant and affect children most acutely, although harmful effects extend for hundreds of miles around each plant. Preliminary data indicate that, every year, at least 17,000 deaths and 11,000 heart attacks can be directly linked to the mercury emissions alone.

The emission restrictions at issue are extensive. They require a removal of 90% of mercury emissions by 2015, along with 80% of sulfurous oxides and 52% of nitrous oxides by 2018.

Cutting this amount of emissions is tantamount to transfiguring the entire electricity generation grid… in less than a decade.

It is that four-year window on mercury, however, that has the industry most concerned.

What I Am Seeing

First, more than 60 gigawatts (GW) of capacity will be coming off the grid by 2020 – more than twice as much as was retired in the decade from 2000 through 2010. Since the new rules begin their phase-in less than a year from now, power companies must make decisions now based upon the harsher emission limits.

Second, we will experience an even greater movement to natural gas and renewable energy as sourcing for new power plants. In fact, moving forward, there is now not a single co-fueled facility (one that can use both coal and gas) on anybody’s agenda.

The result: We can expect natural gas to replace more than 20% of coal in the generation of electricity in the next few years, translating into the need for some five billion cubic feet a day of gas by as early as 2015.

This explains the rapid increase in gas extractions at unconventional fields (shale gas, tight gas, coal bed methane) – even despite the present market’s depressed prices. There is shortly going to be a hefty increase in domestic demand, and everybody in the industry knows the sourcing of that increasing demand.

My Evaluation of the Impact (It Is Extensive)

These new standards will apply to 31 states and the District of Columbia. That makes for a considerable impact.

Even in those states where the rules will not apply (at least initially), interstate power transmission lines will still extend the EPA’s jurisdiction.

When I first talked about this issue here last October, I predicted that generating plants in 17 states would close as a direct result of the new standards. This will translate into a much greater amount (than the 60 GW already announced) of existing generating capacity coming off-line by 2020.

My latest estimates put the generating capacity moving off-line at 15% above the levels I concluded five months ago and now directly resulting in closures in 19 states instead of 17.

The result is a rapid acceleration in natural gas as a fuel source and the continuing overall decline in the use of coal.

But this is hardly happening across the board.

Coal will still comprise a significant ingredient in power production in those regions where:

  1. the concentration of coal-only electricity generation is too great to allow a short-term transition; and
  2. movements are already in place to improve the situation.

And that means some of the larger providers are in the center of this issue. Primary among them is American Electric Power Co. (NYSE:AEP), whose Virginia/Appalachia network is 84% coal-fired.

In a report issued Wednesday, the Environmental Defense Fund has identified three AEP plants – one each in Ohio, Indiana, and Texas – as among the 25 leading emitters of mercury in the country.

In response, AEP has initiated its own remedial program. Since 2000, the company has reduced mercury emissions by 36%, sulfur dioxide by 63%, and nitrogen dioxide by 79%.

Yet this comes at a significant cost, both to AEP and consumers. Estimates put the price tag at well over $2 billion over the past five years for Virginia-Appalachia alone. Those costs are largely passed on to consumers via increased rates.

And that is where the next stage of these developments will play out.

Sincerely,

Kent

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Joe Howell
    March 18th, 2011 at 12:06 | #1

    What specific stock/option recommendations would you now recommend?

  2. Bert Ekstrom
    March 18th, 2011 at 12:12 | #2

    Are you telling me to get out of AEP and start buying Natural Gas while it is cheap?

  3. rick
    March 18th, 2011 at 12:59 | #3

    Sounds like natural gas is the place to be.

  4. debby
    March 18th, 2011 at 14:00 | #4

    I live in Indiana and most of our energy comes from coal. Coal companies and the associated power companies have known for years that mercury is a dangerous toxin to the human body. How many have take action to tackle this problem? The answer is very few have taken action to protect the health of their customers and the environment. They have chosen profits over people. If more of these companies had taken action and acted responsibliy then EPA would not have to act. Instead of acting in aresponsible manner many coal and power companies did nothing be lobby Washington. Now their customers are going to have to pay large increases in rates or power companies will be forced to switch to natural gas. Had these coal and power companies acted more responsibily, it could have saved themselves and their customers much financial pain. They did not. I have owned both coal and nat gas companies and will continue to into the future. For the power industry and especially coal companies to cry, whine, and whimper about the regulations of dangerous mercury is lame at the extreme. Most have failed to take action. Again it looks like profits were more important than the health and well being of their customers.

  5. Richard Moses
    March 18th, 2011 at 14:40 | #5

    So what are we going to do with the excess coal that will result as we shift to Natural Gas? Will it be left underground, unmined; which can only enrich the country as we won’t be spoiling the landscape; but what about coal already dug up? And what do we do with coal which has a high sulphur content? Already I am seeing a shift in refining crude oil to being about a lower sulphur levels in refined fuels; which I feel is good for the country; and there are also places where natural gas is being cleaned (?) to reduce noxious odors which get released when NG is burned.
    The question will remain about what to do with our coal?

    One thing that the energy industry really needs to address, is the rest of the physical plant – meaning the system of wires which carry electricity across the country. Much of that needs to be replaced, and to date, I haven’t seen much work going into replacing old, out-dated power transmission lines.

  6. john
    March 18th, 2011 at 14:44 | #6

    who to invest in now

  7. Roy Jennings
    March 18th, 2011 at 15:33 | #7

    I WAS EXPECTING TO FIND A LIST OF SEVEN NAMES OF COMPANIES WE COULD BUY.
    ARE YOU GOING TO LIST THEM FOR US?

    SINCERELY
    ROY JENNINGS

  8. leo wayne
    March 18th, 2011 at 16:04 | #8

    v interested in gas stocks

  9. Kevin Richardson
    March 18th, 2011 at 17:09 | #9

    Interesting information! I’m always left wondering and waiting for the rest of the story.??..?? Where’s Paul Harvey when you need him? I’m your energy advantage customer and I’ll be looking for your million dollar investment ideas in your next update!

  10. Michael Limpert
    March 18th, 2011 at 18:09 | #10

    So,how does this play out? We reduce coal domestically; we continue selling coal to China. China burns it with minor concern about emissions. Their airborn emissions travel east and disperse over the U.S. We pay more for energy but still have the emissions?

  11. edwe skrabacz
    March 18th, 2011 at 18:28 | #11
  12. N C Mosley
    March 18th, 2011 at 19:43 | #12

    What do you think about investing in royalty (mineral) rights to natural gas?

  13. Ralph P.
    March 18th, 2011 at 23:04 | #13

    CHK

  14. Michael Upper
    March 19th, 2011 at 12:30 | #14

    Are co-fueled electric generating plants being designed or built that utilize natural gas and solar or natural gas and wind? My son-in-law has an organic farm and ranch in the San Luis Valley in Colorado and uses a co-fueled furnace for heating the large green house in winter. The furnace uses wood and solar. I will know more about the success of that later this year. This is the first winter of using it.

    Thanks, Michael Upper

  15. Richard
    March 19th, 2011 at 17:07 | #15

    Not only do I subscribe to Dr. Kent Moors Oil and Energy Investor newsletter, but also the Energy Advantage, and this week the Inner Circle. In fact, since investing on Tuesday the acquired Inner Circle recommendations have returned almost 5% by the market close on Friday. The discounted Inner Circle subscription cost was a bargain, and more than paid for in a few days. Considering the problems in Japan, and the turmoil in Lybia/Bahrain not a bad return for investing in energy. Try getting that return last week in any other sector! I want an advisory energy expert on my shoulder not only for current energy plays, but most importantly, the energy plays down the road.
    Thank you, Dr. Kent Moors.

  16. Dan
    March 20th, 2011 at 19:09 | #16

    Where do we find the answers to the above questions?
    What do you expect to happen with AEP?

    Thanks,
    Dan

  17. Bud McCall
    March 22nd, 2011 at 18:03 | #17
  18. STEPHEN KENNEDY
    April 10th, 2011 at 13:37 | #18

    WE SUBSCRIBED FOR SPECIFIC INVESTMENT NAMES, NOT JUST DISCUSSIONS OF AN INDUSTRY ?????

  19. Sumflow
    May 13th, 2011 at 20:35 | #19

    STEPHEN KENNEDY :
    WE SUBSCRIBED FOR SPECIFIC INVESTMENT NAMES, NOT JUST DISCUSSIONS OF AN INDUSTRY ?????

    STEPHEN KENNEDY :
    WE SUBSCRIBED FOR SPECIFIC INVESTMENT NAMES, NOT JUST DISCUSSIONS OF AN INDUSTRY ?????

    Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.

    Chinese Proverb

  20. SGK
    July 5th, 2011 at 12:04 | #20

    sunflaw,

    A man who won’t sign his real name to a comment, has no Huevos
    An old Spanish Proverb

  21. Johnny
    September 26th, 2011 at 18:26 | #21

    come on! When you recommend something, give the companies to consider!~

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