Yesterday, President Obama announced America's first-ever clean power plan, a historic move that will drastically affect our current and future energy economy. Its regulation will reach every single energy stock in existence, and some are more prepared than others. Here's what you need to know.
"No challenge poses a greater threat to our future...than a changing climate." These were the leading words from President Obama as he unveiled what he undoubtedly hopes will be a historic moment for the United States. As he put it, America has been setting a lot of records lately -- but not good ones. Extreme temperatures, severe weather, increasing air pollution -- these are all issues that POTUS believes are caused by climate change. And climate change, President Obama definitively notes (and the overwhelming majority of scientists agree), is caused by humans and the carbon we emit.
Globally, the United States' carbon emissions are second only to China's. Our emissions emerge from a motley crew of culprits, but chief among them are power plants -- 32% of our nation's greenhouse gas emissions come from electricity generation.
In a sentence, Obama's clean power plan is an attempt to de-carbonize our energy economy. To do so, the President has set his sights on three main strategies: 1) improve the heat rate of existing coal-fired power plants, 2) switch out coal for natural gas, and 3) ramp up renewable energy generation.
The plan will vary state by state, allowing each to choose which metrics and strategies work best for it (within the confines of a larger mandate, of course). If all goes as planned, power plant carbon pollution in 2030 will be one-third of what it was in 2005 -- solid progress on a clean power plan many think we're already too late to address.
If you thought the EPA was entirely full of tree-hugging hippies, think again. In its overview of the Clean Power Plan, the Agency makes itself clear:
Fossil fuels will continue to be a critical component of America's energy future.
But while the EPA isn't targeting fossil fuels explicitly, it has its sights set directly on the large amounts of carbon emitted when most fossil fuels burn. That might make it seem as if coal-heavy utilities like Duke Energy Corporation (NYSE:DUK), with a 2,240 MW coal-fired power plant on its asset list, are headed for trouble.
But utilities have mechanisms to accomodate the new plans. While Duke Energy's 2,240 MW coal plant may be one of the largest in America, it also consistently ranks as one of the most efficient. For its less efficient plants, Duke has already retired 15 coal units, with capacities ranging from 100 MW to 575 MW, with plans to potentially shutter five more.
The coal stocks that will be hit hardest by Obama's Clean Power Plan are actually coal extraction companies. The general demise of domestic coal companies is hardly news -- the entire sector has been on a major decline for nearly five years, as evidenced by the Dow Jones U.S. Coal Index.
In the wake of Obama's announcement, a corporation that enjoyed a nearly $900 million market capitalization one year ago officially filed for Chapter 11 bankruptcy as it "weathers a historically challenged coal market." Even Peabody Energy Corporation (NYSE:BTU), one of the largest coal corporations with mines in the U.S. and Australia and a 25-country market, saw share prices plummet following the unveiling. In its latest annual statement, Peabody Energy's note on risks associated with climate change seems to have come true:
Enactment of laws or passage of regulations regarding emissions from the combustion of coal...could result in electricity generators switching from coal to other fuel sources.
Granted, other coal companies have capitalized on the sector's consolidation. Alliance Resource Partners (NASDAQ:ARLP), a relatively spry company with just $2.3 billion in assets on its books, has expanded its distribution and maintained profitability in recent years by ramping up production of in-demand Illinois Basin coal. It also took advantage of Patriot Coal's recent bankruptcy to snag assets which it previously had only partial ownership of.
In the last three months, as private money has moved elsewhere and regulation worries have become woes, Peabody Energy Corporation's stock has slumped 75%, while Alliance Resource Partners has squeezed by with a 25% decline.
A coal comeback?
To play devil's advocate, there are two ways the coal sector could stage a comeback. First, as the EPA notes, it's not against coal -- just the carbon emissions coal produces. If utilities can create cost-effective carbon reduction systems for their coal plants (and some are certainly trying), then coal stocks could find their place in America's clean power portfolio.
Second, the Clean Power Plan could fold altogether. In states like West Virginia, where 95% of its power and a huge chunk of its economy is directly linked to coal, there has been open hostility to a federally mandated Clean Power Plan. In response to the President's announcement, West Virginia Governor Earl Ray Tomblin called the regulations "unreasonable, unrealistic, and ultimately unattainable for [our] state." If Tomblin (and other governors) refuse to sign on, regulatory rigmarole could keep coal companies pushing forward for years to come.
But both these scenarios are unlikely, and both go against a larger trend that coal hasn't managed to keep up with. This week, Obama paved the way for the success of progressive energy stocks -- and companies that have clung to their coal cards aren't among them.