Mississippi regulators have finally had enough with the "clean coal" experiment taking place at Southern Company's (NYSE:SO) Kemper County plant; they've rejected another increase in the budget for the project, which would have been paid for by ratepayers. As a result, the coal industry's flagship "clean" plant will be converted into a natural gas facility -- albeit one that will cost the company about 10 times what simply building it as a natural gas plant from the start would have.
The decision was a major blow for anyone hoping so-called clean coal would be a significant energy source for the future. And this pushback from regulators may mark a big change of heart in territory that's long been friendly to utilities.
The clean coal boondoggle
The Kemper plant was supposed to be a shining example of how to turn coal from a dirty power generating asset into a clean one, or at least less polluting than a standard coal plant. Southern Company originally planned to spend around $1.8 billion building the 582 MW plant, which at $3.09 per watt is more expensive than $1 per watt for a standard natural gas plant, but Mississippi regulators were willing to let ratepayers fund the project because it used new technology and would bring more coal demand.
Of course, the $1.8 billion number was a pipe dream. Southern Company has already spent $7.5 billion on the plant and couldn't even get the "clean" aspect to work properly. This is another black eye for the coal industry.
Where will new coal demand come from?
Kemper's failure isn't just bad news for Southern Company, it's bad for the coal industry in general. The four largest U.S. coal producers -- Arch Coal (NYSE:ARCH), Peabody Energy (NYSE:BTU), Cloud Peak Energy (NYSE:CLD), and Alpha Natural Resources -- are counting on higher demand and higher prices to return them to profitability. But their thesis of soon-to-arrive demand growth doesn't seem to be anywhere near reality.
Between 2008 and 2016, coal demand in the U.S. fell 34.9%, according to the U.S. Energy Information Administration. Most of that reduction was due to cheap, abundant natural gas, which utilities built more plants to burn. And with natural gas prices hovering around $3 per million BTUs coal has little chance to compete on cost alone.
The hope was that a clean coal plant like Kemper would provide a path forward for cleaner coal technologies, which could potentially lower costs even further in the future. Given its failure, coal companies will be relying on demand on the existing base of coal power plants. And that's been a losing bet for the last decade.
Coal's demise is here
Kemper has been a boondoggle of massive proportions, and while it could cost Southern Company billions in the next few quarters, Mississippi's electricity customers will be paying for the overpriced natural gas plant it's being transformed into for decades to come through higher electricity rates. But the pushback by regulators who originally allowed the plant to be built instead of a lower-cost wind, solar, or natural gas plant is notable -- and part of a longer trend. Look for other regulators to push utilities toward these cleaner assets because they're more cost-efficient than coal.
Any investor who thought that clean coal was going to save the coal industry should look to the Kemper plant as proof that the bull thesis on coal is dead. It will continue to decline, and natural gas and renewables will take its place in the energy landscape of the future.