Coal Power Generation Is Being Cut. Will Natural Gas Be Next?

The old saying used to be: "If you can't beat them, join them." It turns out that it doesn't quite work out that way all the time. At least that's the case for FirstEnergy  (NYSE: FE  ) , which is shutting down two coal-fired power plants due to low natural gas prices. The problem is it can't economically justify replacing those plants with natural-gas-powered units. 

Hatfield Ferry coal power plant. Photo credit: Flickr/futureatlas.com

It's also not for lack of trying as the utility has twice proposed converting these aging coal plants to natural gas. Both times the company has had to abandon the idea because the price simply wasn't right. As it turns out, natural gas would have to plunge by 30% and stay that way for a long, long time in order to justify the investment. That leaves First Energy in a bit of a bind because it can't open a new coal-fired power plant either, because of current and likely future environmental regulations.

The two plants in question, Hatfield Ferry and Mitchell, have total capacity of 2,080 megawatts or about 10% of the company's total generating capacity. However, the two plants represent about 30% of the company's $925 million estimated costs of complying with the EPA's Mercury and Air Toxics Standards. That's just too high a cost to keep the two plants operational. 

Over the past year, FirstEnergy has announced the deactivation of 11 power plants within its portfolio. These two most recent plants being deactivated, both located in Pennsylvania, will result in the loss of about 380 jobs in the state. It's really just the latest in a string of coal-related jobs disappearing in the region.

At least the region is blessed with abundant natural gas reserves thanks to the Marcellus Shale. The development of that shale play continues to bring jobs to the region even as coal jobs disappear. One company in which this is most clearly seen is CONSOL Energy  (NYSE: CNX  ) . The gas and coal producer has really been switching its growth objectives toward gas. Once the company's BMX Mine comes on line, it's not expecting to spend capital to grow its coal business any further. Instead, it's looking to grow its gas production by double digits in order to fuel the increased consumption of that resource by utilities that are switching from coal to natural gas. 

That is what's interesting about FirstEnergy's decision not to join the party. Natural gas generation has been an expansive growth area for the industry; many utilities are making huge shifts toward gas. For example, Duke Energy's  (NYSE: DUK  )  generation portfolio has gone from just 5% natural gas in 2005 to an estimated 24% by 2015. Meanwhile, coal will shrink from 55% of its generation capacity to 38% over that same time frame. That has helped Duke generate compound annual earnings growth of about 6% per share while also enabling the company to boost its dividend by about 2% per share annually. 

FirstEnergy's dividend on the other hand has been stuck in neutral for the past couple years. That doesn't make it a bad company or a bad stock. The company has simply been forced to spend a lot of capital over the years to clean up its coal plants. That's enabled it to be in the position to have a portfolio filled with non- or low-emitting generation units. In fact, by 2020, its carbon dioxide emissions will be nearly 30% below 1990 levels. That's not bad for a company whose portfolio is still 56% coal-powered even after these latest two plants have been closed. 

However, despite its best efforts FirstEnergy has spent so much capital to clean ups it generating portfolio that it's finding it hard to grow earnings in a meaningful way. That's why investors might want to look elsewhere for a better stock geared toward profiting from the swelling of the global middle class, which will have energy consumption skyrocketing over the next few decades. The Motley Fool has picked one incredible natural gas company that presents a rare "double-play" investment opportunity. We're calling it "The One Energy Stock You Must Own Before 2014," and you can uncover it today, totally free, in our premium research report. Click here to read more.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 10, 2013, at 5:06 PM, luckyagain wrote:

    Maybe these electric generation plants are so old that they can only burn coal. I know a guy who worked for another electric utility and he told me that all of their plants can run on oil, coal or natural gas. He told me that they switch fuel source depending upon the cost of the fuel and if they need to burn something cleaner to meet air quality standards. I suspect that the real reason for the closure is that demand is falling and these plants are not needed anymore. So the oldest and most inefficient plants are closed first.

  • Report this Comment On July 10, 2013, at 6:08 PM, deekaman wrote:

    "Necessarily skyrocket...."

    Don't forget.

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