Utilities Are Changing Their Tune But It's Not An Exodus

The big news in the U.S. utility industry has been the long-term shift toward natural gas. It's going on across the industry and coal has been the headline loser. But don't think the industry has given up on coal, because it hasn't—and won't, at least not for a very long time.

Gas or coal: BOTH
If you believe the hyperbole, coal is going away and natural gas is taking its place. And news from Southern Co. (NYSE: SO  ) that it is looking to retrofit four coal-fired power plants in Alabama would seem to back that story line. But not so fast...

Just looking at this single situation, Southern is, indeed, looking to switch to natural gas. But the plans are for the power plants to have the ability to burn both fuels. So, if natural gas prices get too high, the company could switch back to coal. That type of flexibility is important for energy companies.

For example, at the same time that Southern is looking to shift toward natural gas at these plants, it is in the final stages of building the coal-fired Kemper facility. That project is billions over budget and is suffering through delays, but it will be the first large-scale U.S. coal plant to use carbon capture technology.

Southern is working on both sides of the isle here because it wants to make sure it can produce reliable, low-cost electricity no matter what's going on with its fuel supply. That's the same thing that fellow industry giant Duke Energy (NYSE: DUK  ) is doing, too.

How about gas, coal, and nuclear
Duke recently completed its own new coal plant (Edwardsport) using coal gasification, making it one of the cleanest coal plants in the country. However, at the same time it has been shifting its fuel mix, with coal decreasing from 55% of the total in 2005 to just 38% by next year. Natural gas, meanwhile, has gone from 5% to 24%.

So Southern is in the good company of Duke when it comes to shifting its mix around, but maintaining a dedication to coal. Interestingly, Duke's nuclear commitment remained relatively constant at about 35% of the total. In fact, uranium miner Cameco (NYSE: CCJ  ) projects that the world will need something on the order of 30% more uranium by 2022.

After Japan's Fukushima disaster, isn't nuclear a dirty word, too? If Cameco is remotely close to correct on the demand side (there are around 70 nuclear reactors being built right now), the answer is no. And it's for the same reason that coal isn't going away. Utilities need options to ensure a reliable power supply. That's why Cameco is confidently building up its production capacity and keeping a few projects in the wings, waiting for the right time to start digging.

Blame China
Interestingly, Cameco sees big demand for nuclear coming from China, where the plan is to go from 17 reactors to 73. Unlike the United States, that country is still building out its energy infrastructure. So it's going to need lots more power. Logic would dictate that it would use the most modern and best technologies. That's why nuclear is a big part of the equation.

But so, too, is coal. In fact, international coal giant Peabody Energy (NYSE: BTU  ) just signed a 50/50 joint venture with Shenhua Group to supply the nation with thermal coal. And, at the same time, it's partnering with the country on its GreenGen clean coal initiative. That project is, like Southern's Kemper, set to use carbon capture technology.

Peabody was the only foreign player invited to that party, putting it in prime position to increase its footprint in China. But these dual initiatives show that the United States isn't the only country where coal is viewed in a negative light, but where demand isn't going away anytime soon.

Southern and Duke clearly show the trend in the United States toward a lower level of coal use—not a complete shift away from the fuel. It's the same thing that's happening around the world, with Cameco and Peabody's efforts in China proving that out. You shouldn't give up on coal, power companies certainly haven't.  

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