The Environmental Protection Agency (EPA) announced new rules today that kick Peabody Energy (BTU) and other coal companies while they're already down. Meanwhile, you can bet that the folks over at Exelon (EXC -0.29%) are popping open the champagne right now, and senior managers at Southern Company (SO 0.62%) and Duke Energy (DUK 0.07%) are nearing tears.
The EPA's proposal would force the U.S. power sector to cut 30% of its carbon dioxide emissions by 2030, compared to 2005 levels. The new regulations are the crown jewel of the Obama administration's climate change strategy. If the new rules survive in their current form, they stand to transform the power sector, which derives nearly 38% of its electricity from coal.
That's great news for Exelon, with its carbon-light resource base. Exelon has been lobbying aggressively for a tight restriction on greenhouse gas emissions, as the company gains a distinct competitive advantage in such a scenario. Indeed, Exelon's CEO Chris Crane specifically expressed the company's support for today's rule proposal in a recent seminar at Resources for the Future, an environmental think-tank.
Source: PDTillman, Wikimedia Commons
There's a war on
It's obviously terrible news for Peabody, whose entire business is coal. The EPA's announcement today is only the latest salvo in what's either called "The War on Coal" or "The War on Climate Change," depending on your political leanings. Earlier this year, Peabody caved to shareholder pressure to publish information on the company's fossil fuel asset risk. The shareholders' concern was that if global governments were to start passing legislation aimed at reining in carbon emissions – kind of like what the EPA did today – then coal assets may become unburnable, thus rendering them worthless. This prospect is known as the "carbon bubble."
Peabody seems to have taken a cue from ExxonMobil in this regard. Shareholder activists withdrew a similar resolution with ExxonMobil after the company, in an apparent policy shift, agreed to provide information on fossil fuel asset risks. ExxonMobil has since released its report, largely to the dismay of environmental activists. The company dismissed the possibility of a low carbon scenario as "highly unlikely," and asserted that none of its fossil fuel reserves would be at risk now or in the future. Others celebrated the move as a victory for shareholder interests and climate campaigners, even if the outcome remained imperfect. Considering ExxonMobil's long history of fierce climate change denial, many observers see the company's agreement to address shareholders' concerns as an important first step.
It'll be interesting to see where Peabody takes its own report. In the face of today's news, and the company's poor stock performance in the last few years, it would be preposterous for Peabody to take the same denialist line that ExxonMobil did.
Ripe for retirement
Coal producers like Peabody are in obvious trouble, but so too are the utilities that depend heavily on coal. The Union of Concerned Scientists published a report in 2013 called Ripe for Retirement: The Case for Closing America's Costliest Coal Plants, which found that as many as 329 coal-fired power generators are no longer economically competitive compared to a typical existing natural gas plant. The group also compared coal with new wind power facilities and determined that as much as 71 gigawatts of coal-fired generating capacity is uncompetitive with wind. Forty-four percent of the non-competitive facilities are owned and operated by just five power companies, including Southern Company and Duke Energy.
Southern Company has already been having a rough go of things. The company has faced cost overruns on some of its recent coal plant initiatives, and it also had to parry a proposed shareholder resolution seeking a more aggressive greenhouse-gas emission reduction strategy. The proponents withdrew the proposal after Southern agreed to integrate more renewables into its energy mix, and to publish a detailed report on its emission reduction efforts.
For its part, Duke Energy responded to today's rule with suggestions that ratepayers will face higher energy costs. "We strive to keep our customers' rates as low as possible," said Duke spokesperson Sally Thelen, "and our evaluation of the proposed rule will include a thorough examination of potential compliance costs our customers will ultimately bear." Nevertheless, Duke seems to have read the tea leaves to some degree, because the company is already in the process of retiring older coal capacity and reducing its greenhouse gas emissions.
Source: Arnold Paul, Wikimedia Commons
Maybe not today, maybe not tomorrow, but soon...
To be clear, I'm not foretelling coal's imminent death. As a fuel source, it's still going to be around for a while. In the U.S., this past winter's harshly cold temperatures drove an increase in demand for coal, and China's voracious appetite for energy guarantees a continued coal market for the near future. But today's proposed rules are surely harbingers of things to come. And for all the safety people see in China's coal demand, the Chinese government has developed an aggressive plan to reduce its coal dependence in an effort to control its horrific smog levels.
Coal has become an albatross that everyone is trying to shake. With such bleak long-term prospects, investing in coal stocks looks like a losing strategy to me.
