One Question the EPA Rules Don't Answer

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Coal made up about 40% of the U.S. electric supply in the first half of the year. It is the single largest source of power. The new Environmental Protection Agency (EPA) rules, if enacted, will make it difficult if not impossible to build new coal plants. The rules for existing plants due out next year could be equally as problematic for the current coal power fleet. This begs the question: Can we really get rid of coal?

Big changes
There is no question that coal is a relatively dirty fuel source, but it also happens to be a vital source of electric power. The new EPA rules are clearly environmentally friendly, but the impact of effectively removing coal from contention as a viable fuel source is a massive industry shift.

For example, giant U.S. utility Duke Energy (NYSE: DUK  ) has a plan to shift its production mix, with an ultimate goal of reducing its reliance on coal. In 2005, coal represented 55% of the company's capacity, natural gas just 5%. By 2015, Duke is planning to increase gas to 25% of the mix, and reduce coal to 38%.

Taking a step back, the company is hoping to reduce its use of coal by 17 percentage points, about 30%, over a decade. A decade...that's a very long time and it still leaves the company more reliant on coal than natural gas.

Through the first six months of the year, Southern Company (NYSE: SO  ) relied on coal for 36% of its capacity. In 2010, the company relied on coal for 58% of its power needs. That's a 20 percentage point drop, cutting its coal reliance by about a third in just two years. Still, at more than a third of its generation, coal remains a vital component of Southern's energy profile.

Not unexpected
The thing is, the shift away from coal isn't unexpected. Arch Coal (NASDAQOTH: ACIIQ  ) expects up to 35% of the coal plants in the United States to be closed by 2018. Almost by definition, the first ones to be shuttered are going to be the oldest, dirtiest, and least profitable plants. That means that the current shift from coal to gas has been "picking the low hanging fruit." Further reductions will be harder to justify economically and environmentally.

In fact, Arch notes that the plants it believes will survive the shakeout only ran at about 60% of their capacity last year. So, as coal plants get shut, the more efficient ones will pick up the slack. In that scenario, demand for coal may dip a little, but it will stabilize at a new, albeit lower, level. That should breath a little life into Arch's thermal coal business, particularly since it has notable operations in the two cheapest coal regions in the country.

To get a sense of how important that is, take a look at Alliance Resource Partners (NASDAQ: ARLP  ) . The company has been posting record results despite the downturn in the coal market because it has been able to increase coal production and sales. The reason is that it operates largely out of the Illinois Basin, which has seen increased demand as utilities shift away from Central Appalachian coal.

Alliance sold over 13% more coal in the second quarter than it did in the same period in 2012. And it expects to post record results for the full year. So the coal market is shifting with the changes in utility use, with some miners better situated than others.

Still a long way to go
And Duke and Southern are actually pretty far along compared to some competitors in their shift away from coal, once their most dependable fuel option. American Electric Power (NYSE: AEP  ) , for example, is looking to drop its coal capacity to around 45% of its total by 2020, but the fuel source still accounts for about 60% of capacity today.

Clearly, the electric utility industry is making changes in its fuel mix and has been doing so for years. However, the shift has been largely a gradual one, not surprising since building electric power plants is expensive and takes a long time. And don't forget that the costs of new plants are generally paid for by the customers of regulated utilities. The idea of a U.S. power grid devoid of coal is nice, but it sure doesn't look feasible over the near term.  

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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 October 06, 2013, at 12:57 PM, tigerade wrote:

    I'll breathe a little easier knowing that coal will be staying in the ground. And doubters, yes, the lights will stay on. A transition off coal is a good thing.

  • Report this Comment On October 06, 2013, at 2:34 PM, EdHamox wrote:

    It's too bad you don't make your living mining coal tigerade. Maybe someone should step in and take away or shut down your means of paying your bills. You're really a very narrow, shallow person.

  • Report this Comment On October 06, 2013, at 3:28 PM, dadx wrote:

    ya tigerade, just how are you going to post any comments while your sitting in the warm glow of your candle staring at a blank computer screen, wishing your electric would come back on? 40% is a very large chunk of power to lose, go out and disconnect 40% of the spark plugs on your engine, go for a drive and you'll see just how much power is lost, then tell us that the lights will still be on.

  • Report this Comment On October 06, 2013, at 4:52 PM, BreatheBetter wrote:

    Yeah - dadx, just how are you going to post any comments while you're gasping for clean air? Do you know how devastating lung disease is to your life up until it takes your life? What about the millions of dollars spent on healthcare from health related illnesses directly contributed from either working the coal mines or breathing the smoke / fumes from burning coal? The cost of which is passed on to you and I in the cost of our own health insurance, The coal issue is bad situation all around. It's bad for the coal miners both health and financially. It's bad for the environment - as a whole and at the coal mining sites. Have you seen the"Mountain Top Mining" sites in Kentucky?! It's devastating the area!! They are literally cutting the tops off the mountains!!! The tops of the mountains, minus the coal, is being dumped in the valley's. It's ending up in their drinking water... Not everyone affected by this contamination works in the mines. What - are they considered collateral damage? Their health and rights matter too you know. You don't see this from the roads but take a drive off the road and it will shock you! As I said it is a bad and SAD situation for the area workers... many of which has earned a living mining coal for multiple generations. But here's a FACT, and one in which I seriously hope and pray that the coal workers acknowledge and eventually accept, but more importantly begin to explore other ways to earn a living as soon as possible - and that is that the coal business is going to be shutdown. Whether WE like it or agree with it or not; it will be shutdown. This is NOT coming from the EPA. They do as they're being told to do from the Whitehouse.

  • Report this Comment On October 06, 2013, at 6:50 PM, howardlangeveld wrote:

    We need to bridge between a reliance on coal and move toward renewable energy sources. Gas may be the transition fuel that could be used for a heat source in the place of coal. Coal is so polluting and devestating to the US environment we can help other countries by not shipping any coal to them. Other solutions are at hand. We can help them solve there energy needs with our solutions that do not include shipping dirty coal.

  • Report this Comment On October 06, 2013, at 7:41 PM, andiconda wrote:

    Coal needs to go, and not soon enough. The addiction to these dirty fossil fuels must be stopped now. If we transition into NG for the next few decades, meanwhile get the renewal's built we will be in much better position to flip it off for good. This Bickering over it is hurting society, the environment, and making the greed in politics rampant.

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