2015 is the year of reckoning for coal.
It’s when coal-fired plants must meet strict new EPA guidelines for emissions.
As you probably know, coal is critical in the U.S. energy sector, providing 40% of the fuel needed to generate electricity.
And it’s not just us. Most of the world still uses coal over every other fossil fuel for power generation. So no matter how dirty it is, coal isn’t going anywhere anytime soon. It’s simply too cheap for us to stop using it.
[ad#Google Adsense 336×280-IA]At the same time, though, coal usage isn’t going to increase, either.
The U.S. Energy Information Administration predicts that no new coal-powered plants will be built between 2018 and 2035.
That’s a staggering number of years, and it would spell the beginning of the end for coal generation in the United States.
So while coal stocks look cheap today – companies like Peabody Energy (BTU), Arch Coal (ACI) and the Market Vectors Coal ETF (KOL) are trading at very attractive levels – ultimately, the chances of coal making a comeback are very slim.
In other words, the stocks above might make great short-term trades, but that’s not the case over the long haul…
New Rules Put the Squeeze on Coal
The new carbon emissions laws are squeezing the coal industry hard.
For example, it would add almost $1 billion to the cost of fitting new systems to existing coal power plants.
And the EPA’s rules for new coal power plants mandate that they emit no more than 1,100 pounds of carbon dioxide per megawatt-hour. That’s well below the current U.S. coal plant average of 1,768 pounds of carbon dioxide per megawatt-hour.
So you can see why no more plants are scheduled to be built between 2018 and 2035. That standard is likely impossible to meet unless future coal plants capture and sequester their carbon, according to The Washington Post.
What about so-called “clean coal”?
Well, as we’ve written before, it’s not a reality. It just refers to ways to store the pollution, not make it disappear, or even reduce it.
The Shift From Coal to Gas is Gathering Pace
These mandated reductions don’t come quickly or cheaply. By 2015, compliance is expected to cost the coal industry close to $100 billion.
What the government is essentially doing is pricing coal out of the power generation business. But what would we turn to instead?
Nuclear has its own set of issues (safety, for example), along with much higher costs and regulatory guidelines.
That leaves the field wide open for natural gas.
Faced with coal’s grim reality, my industry contacts tell me that business is picking up like crazy for conversions from coal to natural gas.
Coal just can’t compete with it. (Unless natural gas trades above $7 per thousand cubic feet (mcf) – something we don’t see happening for several years, based on shale supply.)
The decision isn’t taken lightly, either.
You see, once a coal power plant switches over to natural gas for any period of time, going back to coal is a very expensive proposition. That’s because if it’s left idle for long, the equipment used for coal generation becomes unusable due to deterioration. So there’s no such thing as an “easy switch.”
Investment-wise, coal is an excellent short-term trade – and the stocks I mentioned above are poised for a technical rally. But come 2015, you may get more bang for your buck from the natural gas sector.
And “the chase” continues,
Karim Rahemtulla
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Source: Oil & Energy Daily