Balk to the Future

Coal miner Peabody Energy (NYSE: BTU  ) has been taking some lumps lately. There's flooding in Australia, where infrastructure constraints also guarantee that demurrage costs won't desist. Here at home, high energy costs are eating away at operating efficiency. To top it off, the government just balked on one of Peabody's biggest clean energy initiatives.

FutureGen is an alliance that includes Peabody, global miners BHP Billiton (NYSE: BHP  ) and Anglo American (NYSE: AAUK  ) , and dung-dealing American Electric Power (NYSE: AEP  ) . The initial idea, floated by the U.S. Department of Energy, was to build a coal plant that would capture carbon emissions and store them underground -- all for under a billion bucks. Uncle Sam would cover about three-quarters of the cost to build the sucker.

Just last month, an Illinois site was selected for the plant. Meanwhile, the project's cost was spiraling ever higher. The DOE announced yesterday that it has pulled the plug on the power plant, whose cost had in fact roughly doubled. This has become rather commonplace in the mining sector, but at least a company like Goldcorp has upside from rising gold prices. This cost inflation is a deal-breaker for the DOE, which has dialed back its funding support to solely the carbon-sequestration element of any future project.

Fortunately, Peabody has a few more irons in the fire. There's the comparable GreenGen project in China, led by the parent of Huaneng Power (NYSE: HNP  ) . China's copious cash, combined with its acute pollution problem, makes me believe that a cost overrun won't stand in the way. Peabody is also pursuing coal gasification in an alliance with ConocoPhillips (NYSE: COP  ) , as well as through a recent investment in Cambridge, Mass., start-up GreatPoint Energy.

Peabody won't let this one domestic hitch stand in the way of its pursuit of next-generation coal technology. The company's future depends on it. 


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