4 Reasons Why the EPA Rules Won't Change Coal's Outlook

The press is making hay over the proposed rules the Environmental Protection Agency (EPA) is set to release later this month regarding carbon emissions at newly built electric power plants. The big takeaway seems to be that coal is doomed, even though this particular set of rules really doesn't change the trends that are already in place.

Nobody's building coal plants
At the end of the day, hardly anyone is building U.S. power plants that run on coal. The trend in the industry is clearly to build natural-gas fired power plants and renewable-energy facilities.

For example, Xcel Energy (NYSE: XEL  ) has long been an environmental steward. In 2010, it generated nearly 75% of its power from coal and nuclear. That combination accounted for around 65% of the total last year, with wind and natural gas increasing from 16% of the pie to more than 24%. The company is proud to be the leading wind provider in the United States.

Moreover, Xcel plans to add an additional 2,000 megawatts of wind power to the mix, which would be a 40% increase. Coal plants, meanwhile, aren't on the drawing board. In fact, at the Barclays Midwest Utilities Conference, the company talked about its plans for reducing coal capacity.

Even coal-heavy utilities are making the shift. For example, over the past two years American Electric Power (NYSE: AEP  ) has reduced its reliance on coal by nearly 15%, with an increase in natural-gas generation accounting for most of the drop. Although a first-half price spike in natural gas led to a near-term shift from gas to coal at the utility, the long-term trend is still in place.

Over the next two years, the company expects to increase its natural-gas capacity by more than 60% and trim its coal capacity by nearly 30%. That said, coal represents about 70% of the company's capacity today, so it will remain a key fuel source for the foreseeable future.

The coal companies see it, too
The trend away from coal-fired power generation isn't lost on the coal companies. Arch Coal (NASDAQOTH: ACIIQ  )  expects 35% of domestic coal generation to be shuttered within the next five years. Clearly, the new EPA rules making it harder to build plants that no one is really looking to build anyway isn't going to change much for the coal industry's outlook.

On the flip side, Arch highlights that the coal-fired electric power plants it expects to survive the 35% bloodletting only operated at 60% of capacity last year. As utilities close dirty and inefficient coal plants, cleaner and more efficient plants will likely see increased utilization. Seen through that lens, domestic coal demand outlook isn't as bleak as it first appears.

Going abroad
Arch also highlights the growth of coal-fired power abroad. For example, the company expects nearly 475 gigawatts of coal-fired power plants to come online globally by 2017. It estimates that this expansion will require an additional 1.4 billion tonnes of coal. Peabody Energy has similarly positive global views. That's why U.S. based Arch is increasingly focused on export sales.

So too, are competitors like Cloud Peak Energy (NYSE: CLD  ) . Although export sales only make up around 5% of the company's projected 2013 coal volume, management is focused on expanding that. That process won't be swift, since Cloud Peak has to wait for additional port capacity to be built before it can materially increase its exports.

Arch has port issues to deal with, too. That said, port construction looks likely to coincide well with the building schedule for the world's new coal-fired power plants over the near term.

The oddball and hope
Interestingly, on Arch Coal's map of new coal-plant construction, the United States tops it. That's because Southern Company (NYSE: SO  ) is, as you read this, building a highly advanced coal plant. That said, the plant has blown past cost projections, resulting in charges of $0.70 a share in the first half of the year. So investors are taking the brunt of the hit here.

Still, the plant has some of the most advanced features, including carbon dioxide capturing technology, that should allow it to meet the projected EPA standards, though it won't be affected by the new rule. In fact, Southern expects the plant's carbon dioxide footprint to be similar to an equal sized natural-gas fired plant. While the expense has been hefty, particularly for shareholders, Southern's project could set the standard for a domestic coal-plant renewal down the line.

The rumor mill
The EPA's emissions rules for new power plants are just rumor and conjecture right now. That said, they won't change the existing domestic trend toward other fuel sources or the global trend toward increased coal use. So you shouldn't get too caught up in the media hype about the death of coal. In fact, Southern's new coal plant might actually hold the clues to a far more positive future.

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Reuben Gregg Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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