A select group of coal stocks just got a boost from the Environmental Protection Agency.
On the face of it, it sounds like a major miscalculation - the EPA's latest rules requiring that power plants reduce emissions are actually increasing the use of higher sulfur content coal.
The EPA is requiring that all coal-fired generating facilities introduce sulfur scrubbers to decrease the amount of sulfur dioxide pollution entering the atmosphere.
However, the effect of requiring and installing scrubbers has been to encourage the use of "dirtier" low-grade coal from the Illinois Basin at the expense of the higher-grade Appalachian coal.
At the center of this counterintuitive result is a combination of price and heat content.
That, in turn, has improved the short- to medium-term prospects for this niche of coal stocks...
Why the Market Loves "Illinois Coal"
Thanks in part to new regulations, companies emphasizing the Illinois Basin like Foresight Energy LP (NYSE: FELP) - along with a range of smaller privately held coal producers - are now experiencing a resurgence in demand from power plants. As a result, plans to increase production in these areas are quickly following.
Sulfur dioxide is one of three non-carbon standards the EPA is working to strengthen. The other two involve reducing mercury and nitrous oxide emissions. Both of these objectives can also be accomplished using the same scrubbers as those introduced for sulfur.
That means the initial wave of interest in higher sulfur content coal is likely to continue as more scrubbers are introduced.
Of course, all of this still needs to be placed in perspective.
According to a study by consultancy group Wood MacKenzie, around 217 gigawatts (GW) or some 72% of U.S. coal plants already have scrubbers. And by 2025, 252 GW or 100% of the national capacity will be using them. According to the U.S. Department of Energy (DOE), 1 GW satisfies the needs of more than 708,000 homes.
Nonetheless, by 2020 Wood MacKenzie estimates that 67 GW of coal-fired electricity will have been taken offline as utilities work to comply with the EPA rules. That, taken in combination with more than 90 GW of coal-fired capacity nationwide closing due to the age of facilities, is a major boon to the rise of natural gas as the primary source of electricity generation.
As a result, coal's share of the country's power generation will fall to 33% in 2020 and 30% to 31% in 2030 under the new standards, compared to 41% under existing rules, according to EPA projections.
Even so, according to latest DOE estimates, the United States will still burn 616 million to 636 million tons of coal to produce power in 2020.
Here's the consequence:
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.