The Truth Behind the Government's "Clean Power Plan"

A simple breakdown of what the Clean Power Plan is and how it will affect the power sector, consumers, and energy companies.

Jul 10, 2014 at 11:58AM

The EPA's Clean Power Plan is part of Barack Obama's larger agenda to battle climate change caused by the burning of coal and other fossil fuels. It aims to cut carbon emissions 30% by 2030. The proposal would enforce more stringent environmental standards, requiring states to reduce their carbon footprints. States have until 2016 to comply with the new regulations. 

While there is no arguing that less carbon-dioxide in the air is good for the environment, its effects on the power sector are still up for discussion.

Utility companies will have higher costs                                                            
The new EPA requirements are forcing power plants, which currently produce 39% of US electricity from coal, to transition to other fuel sources.  The cost of this transition will be passed on.  

During a pivotal energy auction for P JM Interconnection LLC -- one of the largest regional transmission organizations in the US -- the price of electricity increased $10 per megawatt-day from its 2013 values. Transmission organizations like P JM get their electricity from power plants. From there it is sold to utility companies (which then distribute it to homes and businesses). Costs for utility companies rise as auction prices increase.

Referred to as the "capacity price," the cost of electricity for P JM rose to $120 per megawatt-day from $110. This price starts in July 2017 and lasts until May 2018. P JM will pass its cost of electricity to utility providers.

Duquesne Light is another example. It provides electricity to roughly 500,000 residents in the Pittsburgh area. In the past year, its cost of electricity increased by 23.8%, or roughly $50 per customer (residential and commercial). This price trend is likely to continue under the new EPA requirements.

Consumers will pay more for electricity              
Currently, prices stand around 7 to 8 cents per kWh (1,000 watts are used in an hour). However, after P JM's auction prices take effect, prices will increase by one to two cents as early as this June. Unfortunately, the future doesn't look any brighter. Prices are expected to increase another two to four cents by June of 2015.

Here's an example. A $100 electricity bill, by 2015, will rise to $150. That's a 50% jump in cost and money out of pocket.

Coal-generated electricity will decrease      
The EPA limits on green-house emissions would force utility companies across all 50 states to reduce their carbon footprint. Simply put, fewer emissions mean less coal production. The new limits vary by state, requiring Washington, Arizona, and South Carolina to reduce emissions by 60% by 2030.

Utility companies will logically switch to other fuel sources in order to replace lost coal production under the new EPA guidelines. The cost per kWh of coal and natural gas are relatively close, roughly 10 cents and 8 cents respectively. However, the price of coal-generated electricity will hike as government regulation raises manufacturing costs.

Companies such as CONSOL Energy (NYSE:CNX) -- the fifth largest coal producer in the US -- will experience decreases in demand as utility companies move to alternative fuel sources. In 2012, CONSOL Energy produced over 55 million tons of coal -- 5.5% of the total US coal production -- operating across Pennsylvania, West Virginia, and Virginia. However, coal consumption is estimated to decrease by 3.1% in 2015. As seen below, this would reduce CONSOL's coal production by nearly 1.7 million tons.

Year

Coal Produced

(millions of tons)

2012

55.8

2015

54.1

A quick back-of-the-envelope calculation: A 3.1% decrease from 55.8 million tons lands 2015 production at around 54.1 million tons. Assuming coal prices are $70 per ton, this 1.7 million ton drop would lower the company's revenue by approximately $119 million in just two years.  

CONSOL also has substantial natural gas operations which accounted for 8% of its 2012 total revenue.  It is better situated than many other coal companies to transition from coal to natural gas in order to meet the EPA standards.    

Natural gas will replace coal as the primary energy source for electricity
According to the US Energy Information Administration, consumption of natural gas for electric power generation will account for 33% of the increase in total natural gas consumption by 2040. Also, production in natural gas is projected to overtake coal-generated electricity by 2035. Natural gas companies such as Rice Energy (NYSE:RICE) will greatly benefit from an increasingly gas-fueled society.

The company has drilling sites in Pennsylvania and Ohio, covering almost 90,000 acres of the Marcellus and Utica shale. The company has increased its number of leasehold positions by 50% in 2013 and continues to grow its number of wells. Rice expanded operations in Ohio to capture growth in the Utica shale, which increased its natural gas production by 28% in the final quarter of last year. This equates to 43.1 billion cubic feet of gas and $460 million of opportunity, according to the U.S. Energy Information Administration. 

Rice went public in January of this year and has a promising future.  Its positioning over the Marcellus shale -- estimated by Penn State University to be the second largest natural gas field in the world --  primes it to capture future demand for natural gas.  

EPA makes power pricey    
It is unclear whether or not the EPA will achieve its goal of reducing carbon emissions. However, there is no doubt that the price of electric power will go up for both utility providers and consumers as the energy sector is forced to transition from coal to alternative sources of electricity.

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Kyle Richert has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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