Are Higher Prices the Future of Energy?

Southern Company (NYSE: SO  ) is a giant U.S. utility. Like most other electric players, it's been shifting toward natural gas in recent years. However, that doesn't mean it's given up on old reliable: coal. Right now it's building, at great expense, the model for a coal future. It isn't going as well as planned.

No quitters here
Southern isn't the only company to build a new coal-fired power plant in recent years. For example, competitor Duke Energy (NYSE: DUK  ) just got its Edwardsport coal plant up and running, though it's not up to full speed just yet.

Duke got about 40% of its power on the regulated front from coal in 2013. That's a notable sum, and adding Edwardsport shows a commitment to keeping coal in the mix. Duke's new plant uses the latest coal technology, including gasification. As is, the cost of the plant nearly doubled from initial cost estimates. What Duke didn't want to take on was capturing the plant's carbon emissions.

(Source: Cdtew, via Wikimedia Commons)

That's the technology causing such a fuss at Southern's Kemper plant. In fact, U.S. Energy Secretary Ernest Moniz called Kemper "a plant of the future" because of carbon capture. That's how important the technology is. In fact, he went so far as to say, "We're going to need not 10 maybe 100 more of these plants across the country in the future."

That's why everyone is watching Southern's Kemper plant, and few got excited about Duke building a new coal plant. What's unfortunate is that Duke's decision to stick with proven technology is looking pretty good right now.

Expensive for everyone
That's because Southern started off expecting a bill of around $2 billion for the plant, but costs have now more than doubled. In fact, 2013 earnings were lower by $0.83 a share because of write-offs. So far 2014 isn't starting off well, either, with another $0.27 a share write-off in the first quarter. And the facility still isn't up and running. The goal is to have it on hand to help with the summer peak season.

(Source: U.S. House Subcommittee on Energy and Natural Resources)

Coal is supposed to be among the cheapest energy alternatives, but once completed Kemper will cost more per megawatt to build than a nuclear plant—among the most expensive to build. That doesn't sound like such a good deal anymore. It means that customers will be paying more, the write-offs mean that it's costing shareholders more, and, with good reason, no one appears to be lining up to build the second generation of carbon capture.

Natural gas is next
But that doesn't diminish the importance of Southern's carbon capture dreams. In fact, this plant may be more important than anyone can today imagine. That's because capturing carbon isn't unique to coal, the technology can be attached to just about any electric plant. Coal just happens to be the dirtiest fuel so it's getting the technology first.

That why it's important to remember as we build more and more natural gas plants, that burning natural gas is cleaner than coal—not clean. So while coal is the enemy of the environmentalist today, natural gas is the opponent of the future. Southern, for example, is now one of the largest consumers of natural gas in the country; gas generated roughly a third of the company's power in the first quarter. Every watt of energy gas produced released CO2.

So, Moniz is wrong: We don't need a hundred more plants like Southern's Kemper, we needs hundreds. But it isn't coal that's the important feature, it's carbon capture. That's why it's so important for Southern to get Kemper running, no matter what the cost. If the technology works as expected, the next step is to get another large-scale project on the drawing board. Number two should (cross your fingers) go more smoothly.

After Southern's delays and cost overruns, however, getting number two started might be more difficult than getting number one done. That will be a bigger problem for the environment than most people can imagine today. Southern is taking a giant leap of faith with taxpayer, ratepayer, and shareholder money. It isn't going well. However, we should all hope the utility eventually succeeds.

And natural gas is getting big fast...
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Read/Post Comments (1) | Recommend This Article (0)

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 May 25, 2014, at 12:56 PM, speculawyer wrote:

    We should stop burning coal. We don't need it. With Solar PV, offshore wind, nuclear, geothermal, onshore wind, solar thermal, waves, tidal, natural gas, hydropower, etc. . . . we just don't coal.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2966052, ~/Articles/ArticleHandler.aspx, 12/20/2014 4:05:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 17 hours ago Sponsored by:
DOW 17,804.80 26.65 0.15%
S&P 500 2,070.65 9.42 0.46%
NASD 4,765.38 16.98 0.36%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/19/2014 4:10 PM
DUK $82.85 Down -0.16 -0.19%
Duke Energy Corp CAPS Rating: ****
SO $49.02 Up +0.02 +0.04%
Southern Company CAPS Rating: ****

Advertisement