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It's no surprise that old and inefficient coal power plants are being shut down and are, generally speaking, being replaced by natural gas and renewable energy options. The coal industry is well aware of this long-term trend, but is probably less concerned than you might think.
The Sierra Club issued a release celebrating the announced closure of the Brayton Point Power Station in Massachusetts. That pending closure brings the total to 150 since 2010, according to the group. While the American Coalition for Clean Coal Electricity was less than enthusiastic about the closure, the trend toward reduced use of coal isn't new.
For example, coal-heavy American Electric Power (NYSE: AEP ) , which gets about 60% of its electricity from coal, has plans to reduce coal to about 45% of its fleet by the end of the decade. Duke Energy (NYSE: DUK ) has been working to reduce coal from 55% of capacity in 2005 to 38% by 2015, with natural gas picking up the lost share.
While historically low natural gas prices have been a big impetus for the shift, the relatively dirty nature of coal was an important aspect, too. In fact, it was only after this shift started that new Environmental Protection Agency (EPA) regulations were announced. If enacted in their present form, the rules would make it that much harder for American Electric Power and Duke Energy to build new coal plants that they weren't interested in building anyway.
Unfortunate, not shock and awe
So while coal opponents are making a big deal out of closures and the new EPA rules, there's no shock and awe in coal land. For example, Alpha Natural Resources' (NYSE: ANR ) count of coal plant closures or conversions actually totals 212 units. The impact, according to Alpha will be disproportionately felt in the Northeast, but the closures on its radar span 28 states.
Industry giant Peabody Energy (NYSE: BTU ) , meanwhile, expects around 70 gigawatts of coal power to be retired over the next three years alone. But there are mitigating factors. For example, in the company's third quarter earnings review it noted that coal use has increased this year while natural gas use has fallen. If so many coal plants have been or are going to be shut, how is that possible?
The answer is that the U.S. coal fleet isn't running at capacity. Peabody estimates that coal plant utilization is around 60% today, but could go as high as 80%. It was at 55% last year, so there's clearly room for utilities like American Electric Power and Duke to continue closing plants and for coal demand to remain stable. In the end, fuel prices will remain the bigger near-term determinant of fuel choice. That will help coal miners like Peabody and Alpha.
Some get hurt more than others
Interestingly, because of the heavy concentration of closures in the Northeast, eastern thermal coal miners are likely to feel the biggest impact over the long-term. Fewer nearby coal plants will reduce demand and shipping costs to other locations will be a competitive disadvantage. Alpha gets about 45% of its top line from its eastern thermal operations and only around 10% from its western business, so that's a long-term concern for the company. Peabody is more broadly diversified.
One of the best positioned for the shift is probably Cloud Peak, which only mines for coal in the west. That said, the company isn't pinning its future on flat domestic demand any more than Peabody or Arch. Like all U.S. miners, Cloud Peak is setting up for increasing foreign demand, particularly from Asia.
While a nice round number like 150 draws attention, the news isn't new or particularly exciting. Some miners will face more challenges from the well-known trend away from coal, but others are fairly well positioned for it.
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