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Coal's Future Is Full of Mixed Messages

By Justin Loiseau - Feb 25, 2014 at 11:05AM

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Will companies keep cutting coal, or will clean coal create a comeback?

Source: Duke Energy Corporation, Weatherspoon Coal Plant Implosion. 

Energy corporations are cutting coal as fast as they can -- but the future of this fuel is still unknown. New data suggests that utilities with coal assets like Duke Energy Corporation (DUK 0.59%) and Southern Company (SO 0.55%) may be in for more cuts, but clean coal could offer an out. Here's what you need to know.

Cutting coal
According to a recent report from the Energy Information Administration, more companies are going to cut more coal in the next three years. As early as 2015, utilities' estimates for coal-fired power plant retirements veer well below projections from the Administration's Annual Energy Outlook 2014.

Source: EIA.gov. 

The main push behind utilities' modernization moves comes from the Obama administration's Mercury and Air Toxics Standards. This regulation comes into effect in April 2015, and it requires significant reductions in several coal byproducts. By the EIA's estimate, the threat of hefty fines should result in 90% of all coal-fired capacity retirements to occur by 2016. 

Already, utilities have been cutting coal at unprecedented rates. While companies retired just 29 units in 2010, 85 plants were shuttered in 2012. Duke Energy Corporation alone plans to eventually retire a whopping 6,300 MW of capacity. With seven of its 14 coal-fired power plants already decomissioned, Duke Energy is quite literally blowing up its coal capacity. 

Not over yet
But EIA's retirement projections may be too high. While air emissions standards will result in heavy fines, utilities may still foot the bill because of coal's relatively cheap production costs.

With natural gas prices up 50% this year to a four-year high, energy companies are scrambling to find cheaper energy. According to data compiled by Bloomber, an average natural gas plant makes $3.04 a megawatt-hour off its fuel, compared to a whopping $31.58 for coal-fired plants. 

While coal might seem like a no-brainer bet, "clean coal" is far from a sure thing. Southern Company has been working hard to bring its 582 MW Kemper County, Miss., clean-coal plant online, but the $5 billion project is currently 65% over budget.

A Department of Energy report estimates that clean coal costs are roughly double that of coal, but companies like Southern Company are hoping to reinvent coal's future. Understandably, considering the company currently relies on coal for 36% of its 45,740 MW of generating capacity. 

Using a gasification process, Southern Company can remove carbon dioxide entirely from the burning process, which it will then sell to Denbury Resources Inc. (DNR). The Texas oil and gas company plans to use the CO2 to help extract oil, which will effectively put Southern's per-megawatt emissions below the new standards, while allowing Denbury Resources Inc. to make the most of its fields.

Not all companies are over budget on clean coal, either. On the burial site of its 500 MW conventional coal plant in Indiana, Duke Energy Corporation celebrated the grand opening of a new 618 MW clean-coal plant last June. Duke's plant also employs gasification, and boasts ten times the power production with 70% fewer emissions, compared to its polluting predecessor.

Source: Duke Energy Corporation. 

The crux of coal
Ironically, the future of coal has nothing to do with coal, and everything to do with politics and natural gas. Coal prices have been pushed higher by environmental compliance costs, making it a tasteless investment for many energy companies. But soaring natural gas prices mean those same costs are looking a lot more feasible as energy prices head higher.

Conventional coal is out, and the fuel's future depends on how far clean-coal technology can actually go. Keep a close watch on innovations, and you may find yourself on the forefront of America's next energy revolution.

Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Southern Company. The Motley Fool owns shares of Denbury Resources. 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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Stocks Mentioned

Duke Energy Corporation Stock Quote
Duke Energy Corporation
DUK
$113.24 (0.59%) $0.66
The Southern Company Stock Quote
The Southern Company
SO
$80.16 (0.55%) $0.44
Denbury Resources Inc. Stock Quote
Denbury Resources Inc.
DNR

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