Getting Rid of Coal Isn't As Wise As You Think

Utilities are increasingly looking to shut coal power plants. However, that comes at a price -- an increasing reliance on natural gas. Some industry participants are starting to think the trend is going too far.

A big problem
Coal miner Alpha Natural Resources (NYSE: ANR  ) highlights the problem coal faces: Nearly 300 coal-fired electric plants are on the chopping block in the country. That's around 43.5 gigawatts of power set to disappear. The biggest impact is expected to be felt in the eastern part of the country.

That's a notable problem for Alpha since around 45% of its business in 2012 came from its Eastern steam-coal operations. As coal plants in the region shut down, it will see demand weaken. However, not everyone appears to be on board with the plans to keep shutting coal power plants. In the Northeast that's because natural gas is accounting for an increasingly large percentage of the market.

According to ISO New England, the regional transmission organization serving Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, natural gas accounted for more than half of the region's energy in 2012. And that seems set to keep going higher.

Closing up shop
For example, Dominion Resources (NYSE: D  ) bought the largely coal-powered Brayton Point power station in 2005. It then spent $1.1 billion to install pollution-control equipment. Falling natural-gas prices, however, turned that investment into a mistake, and the company sold it, and two other plants, to Energy Capital Partners for a mere $650 million.

And despite the discounted sales price, Energy Capital Partners plans to shut the plant because it's unprofitable. ISO New England, however, seems to be less then excited about the plant's closure. Although it can't stop the plant from closing, the organization has identified the growing reliance on natural gas as a "key strategic risk." At the turn of the century, natural gas accounted for just 15% of the region's electricity pie.

And it isn't the first time ISO New England has brought up the issue. It was also against Dominion's plans to close the Salem Harbor facility. Dominion has basically been exiting merchant-coal power in an effort to focus on more stable regulated-power businesses underpinned by natural gas. In fact, the company seems really enamored of the fuel, working on a liquified-natural-gas export facility and partnering on a midstream venture.

But what if...
The problem is that natural-gas prices are low today but have a history of being both volatile and much higher. As recently as 2008, natural-gas prices were three times as high as they are today. And price spikes aren't uncommon; the cold snap that started the year off caused a notable natural-gas price jump in the Northeast. And that's just because of cold weather.

Source: Energy Information Administration 

If there were any disruption in the supply of natural gas or a prolonged price spike, without other options, there could be big problems in the Northeast. That could mean cost spikes or, worse, not enough electricity to go around. That may seem unlikely today, but it isn't as impossible as it seems.

Building new coal
That doesn't mean that Southern Company (NYSE: SO  ) , one of the largest users of coal, is any more safe than Dominion. However, it puts the company's decision to invest in a state-of-the-art coal power plant in a new light.

Sure, Southern's Kemper facility is over budget and behind schedule, but when it opens its doors, it will be among the cleanest coal plants in the country and set to provide Southern customers with decades of low-cost coal-fired electricity. Southern won't be immune if gas prices spike, however, it will have other options. That's basically what ISO New England is warning us about: other options are increasingly important as more and more utilities switch to natural gas.

If you are considering buying a utility, look for one that has a balanced portfolio -- not one that's increasingly reliant on today's hot investment theme.

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