You probably haven't heard this story -- it's been overshadowed
by the media's ubiquitous coverage of the Supreme Court health care
But while every back was turned, the Environmental Protection
Agency (EPA) quietly released new regulations that could cripple,
or possibly even kill, many U.S. coal companies.
On March 27, the EPA unveiled a stringent proposal to limit any new
power plant to a maximum emission of 1,000 pounds of carbon dioxide
(CO2) per megawatt of electricity produced. The average coal-fired
plant currently operates well above that threshold, releasing 1,768
pounds of CO2 per megawatt.
As I've told readers of my
Scarcity and Real Wealth
advisory, this new rule doesn't just jeopardize many coal miners.
It could be the final blow that virtually eliminates any future
construction of coal plants in the United States (at least those
without cleaner-burning coal or expensive scrubbing equipment).
The entire coal industry has already been taking a beating as it
faces harsh competition from cheap and abundant natural gas.
The White House concedes that it lacks the votes to push costly
climate-change policy through Congress. So if it can't implement
environmental standards through the proper legislative channels, it
will just bypass them and mandate through the EPA.
Heavy-handed government regulation is punishing investors, workers
and homeowners. If we shun coal resources in favor of more
expensive fuels, then power-generating costs will rise -- and so
will your monthly electricity bill. Count on it.
When speaking with the
San Francisco Chronicle
as a candidate, President Obama flatly said that "electricity rates
would necessarily skyrocket" under his policies. He later promised
high fees on greenhouse gas emissions that would "bankrupt"
companies that build coal power plants.
There's no denying that coal gives off unwelcome pollutants. But
recent technological advancements have dramatically blunted the
negative effects of burning coal . For instance, U.S. coal
consumption has risen by almost 80% since 1980, while emissions of
sulfur-dioxide -- a component in acid rain -- have been slashed by
40%. Meanwhile, the development of selective catalytic reduction (
) systems has eliminated 90% of nitrogen oxides (NOx), which react
to form smog.
Coal facilities that are already under construction (or have
permits) will be exempt from the new requirements. But for all
future plants, the "New Source Performance Standard," as it's
called, isn't just a disincentive -- it's a de-facto ban.
The rule doesn't apply to existing coal-fired plants (which account
for about 45% of the nation's electricity). But they are already
being phased out. Utilities have already announced plans to close
300 boilers with a combined 42 gigawatts of power-generating
capacity, according to the
. That's about 13% of the United States' coal-fired electricity.
Retiring these plants must have made more financial sense than
outfitting them with pollution-reduction systems.
Industry insiders say there are even stricter EPA rules on the
horizon (which will likely be implemented after the presidential
election in November, naturally). Meanwhile, efforts are underway
in the House and Senate to block the EPA and other bureaucratic
agencies from circumventing Congress in matters such as these.
So this mess could potentially end up as another constitutional
debate under the purview of the Supreme Court.
As you might expect, industry advocates have strongly denounced the
The American Coalition for Clean Coal Energy, a coal industry
group, points out that prior rules have already led to the closure
of 140 coal plants, eliminating jobs and driving energy prices
I'm more interested in the
's interpretation of this debate. Coal stocks generally pulled back
about 3% to 4% on the news, but I would caution investors in this
sector to evaluate each company individually rather than make
blanket assumptions. For example, the outlook is very different for
thermal coal, which is used in power plants, and metallurgical coal
-- which is used in steel production.
Furthermore, any drop in demand for coal at home will just
encourage producers to send more to overseas customers.
Despite what's going on here, coal has been the fastest-growing
global fuel source in the past decade. China alone is planning to
build 600 megawatts of coal-fired power generation in the next 25
years. For context, this increase represents more than the current
coal-generating capacity in the United States, Europe and Japan
combined. Every 100 megawatts of additional capacity will require
an additional 330 million metric tons of annual coal consumption.
That's why I've got my eye on U.S. coal companies whose exports
have already grown sharply thanks to strong demand from other
regions, in particular Asia.
Risks to Consider:
As if the coal industry didn't have it bad enough, it's
basically fighting a battle on two fronts. Not only does it face
ominous regulation, but as I mentioned earlier, natural gas prices
are plummeting. This is giving further incentive for utilities to
build natural gas-fired plants instead of coal-fired plants. If the
trend of cheap and abundant natural gas continues, then this could
further weaken coal producers until they can position themselves to
Action to Take -->
Whether its subsidies or penalties, the carrot or the stick,
investors need to be aware of changing regulatory environments.
Whenever the playing field tilts, it hurts some companies and helps
In this case, the EPA's proposed standards could lead to a big
score for natural gas, which is already benefiting from every coal
fumble. The average natural gas plant emits just 800 pounds of CO2
per megawatt -- well under the 1,000 limit.
This is the next best thing to the federal government ordering
utilities to burn more natural gas. If this proposal goes through
as planned, it could be yet another positive
for stocks such as
National Fuel Gas (NYSE:
. Meanwhile, as I've stated in my
Scarcity & Real Wealth
advisory I'll keep watching a few coal players closely, especially
the ones that could benefit from the rising coal demand in growing
economies such as South Korea, India and China.
Scarcity & Real Wealth
from the rarest and most valuable assets on the planet. These
critical inputs are in short supply, yet worldwide demand is
exploding, making these rare assets some of the best investments on
earth. To find out more,
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CHK in one or more if its "real money" portfolios.