Coal is the ugly stepchild of the energy world. And, right now, natural gas, the pretty child, is increasingly taking coal's place. However, both are still the children of carbon, which is at its base a dirty fuel choice. Carbon dioxide is the big boogeyman for coal right now, but U.S. Energy Secretary Ernest Moniz is already warning that natural gas is next in line for a scare.
During recent written testimony before the House Committee on Appropriations Subcommittee on Energy and Water Development and Related Agencies (say that five times fast), Energy Secretary Ernest Moniz included one line that should send shivers up the spine of every utility: "Looking into the future, CCS [carbon capture] technologies will be required for natural gas, as with coal, to be a major player in a low-carbon world."
Right now, natural gas is being viewed as a way to reduce carbon emissions. But Moniz is warning that this positive view is temporary, at best. He's requesting $25 million for, the "Natural Gas Carbon Capture and Storage" demonstration program. That's a tiny sum, particularly when compared to what Southern Company (NYSE:SO) is spending to build the first large-scale coal carbon capture facility.
The plant was originally expected to cost around $1.8 billion, but because of cost overruns and construction delays it will now cost more than $5 billion. The Energy Department chipped in a $270 million grant, and Southern could earn a similar amount in tax credits if it reaches certain carbon capture milestones. But, clearly, the cost Southern has taken on has been huge.
And, according to environmentalists, that price tag will make Southern's Kemper plant even more costly than nuclear plants. Putting numbers on that, the Sierra Club estimates Kemper will cost about $6,800 per kilowatt to complete, while a nuclear plant costs $5,500 per kilowatt. A natural gas plant can cost as little as $1,000 a kilowatt.
What was Southern thinking?
On one level you might ask yourself what Southern was thinking building such an expensive plant. However, proving this technology will be a boon for coal and natural gas. Indeed, Moniz recently said that, "We're going to need not 10 maybe 100 more of these plants across the country in the future." He may have been talking about a coal plant, but it was the future of carbon capture technology that he was thinking about.
And this could be a bigger problem than you think. For example, power companies around the country are increasingly shifting toward natural gas. That includes Southern and fellow giants like American Electric Power (NYSE:AEP). Southern generated about half of its power from natural gas in the first quarter of 2013, though rising gas prices dropped that to around a third in the first quarter this year.
AEP, meanwhile, has been shifting hard toward gas for years. Using 2005 as a baseline, it plans to increase the size of its natural gas fleet by 65% by 2016. Coal, meanwhile, is set to see a decline of over 30%. That said, coal still makes up the lion's share of AEP's generation, at about 75% of the total. This, of course, means that it just has more near-term issues to tackle with regard to carbon emissions.
The shot across the bow
The trend toward natural gas is obvious, with some regions relying on the fuel for over half of their energy needs. And this shift is likely to continue, particularly since the U.S. government is pushing even more stringent emissions rules. The easy, near-term fix is to build natural gas. However, that may not be the best long-term answer.
Moniz is already telegraphing that carbon capture will eventually hit natural gas facilities. That would cause more pain down the line for Southern, AEP, and others that are shifting to the fuel. Keep an eye on carbon capture and don't be lulled into believing that natural gas is the answer because it, too, will be in the carbon crosshairs some day. We had all better hope there's a second act to Kemper.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Southern Company. 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.