Yesterday the White House released the final version of the Clean Power Plan, a firm step to lower emission from power plants. The U.S. is responsible for nearly 17% of the world's annual greenhouse gas emissions and coal based power plants are the primary source of this contamination. As it is, U.S. coal producers have been under tremendous stress over recent times and this new plan will come as an added blow.
The New Rule
Per the Clean Power Plan, the U.S. Environmental Protection Agency (EPA) calls for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. This is slightly stricter than the draft proposal wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030.
The final version lays out state-specific interim and final goals for each state, based on these limits and each state’s mix of power plants.
Objectives of the Clean Power Plan
The new plan will encourage energy conservation, energy efficiency plans, use of renewable and clean alternative technologies for lowering air pollution and other adverse impacts of energy production. This ambitious EPA program aims to boost electricity generation from renewable sources and create new job opportunities in the process.
Where Does Coal Get to Stand?
A recent release from the U.S. Energy Information Administration (EIA) projects that lower domestic demand and shipments will lead to a decline in coal production of 75 million short tons (MMst) in 2015. The EIA not only claims that this decline will be widespread across all coal-producing regions but also sees no respite in 2016 with production remaining on par with the prior year.
Thanks to the shale gas boom, coal has steadily been losing ground to cheap natural gas in the U.S. electric utility industry. Per the EIA, coal-based power generation is expected to average 36% in 2015, down from 39% in 2014. In spite of that coal is still the largest source of electricity production in the U.S. The Clean Power Plan has thus been devised to brutally change the fuel generation mix over the next decade.
As a prelude to what is to come we saw natural gas surpassing coal in the fuel mix this April only to give way to coal again. But with the White House bent on the most severe climate policy ever, coal will have a long hard battle ahead.
Sensing what is to come and exploiting cheap natural gas prices, utilities have already started to lower their exposure to coal based production. Xcel Energy Inc. XEL has reduced carbon dioxide emissions during power generation by around 22% since 2005 and American Electric Power Co., Inc. AEP has eliminated over 5,500 megawatt (MW) of coal-fired capacity.
Impact on Coal Stocks
The Clean Power Plan will make sure that U.S. coal stocks continue their southward journey. They’ve already come under severe pressure from the international slowdown, particularly in China, leading to cascading demand for the fossil fuel. This has invariably led to a drop in prices and intensified competition.
This new plan will create further headwinds for the leading coal operators of the U.S. namely Peabody Energy BTU, Arch Coal ACI, Cloud Peak Energy CLD and CONSOL Energy CNX. Prices of all these stocks have dropped significantly year to date.
In this highly challenging environment, coal miners have cut down overall cost through mine closure, slower production rates and layoffs. The new plan would compel the operators to take more stringent measures if they have to remain viable.
Ironically the new plan has talked of thousands of job creation in the renewable energy sector, but what about the probability of job loss of thousands of people tied to the coal industry for their daily bread.
This plan actually has the potential to push some more U.S. coal operators to the brink of bankruptcy. Walter Energy and Alpha Natural Resources have already filed for bankruptcy protection. We would not be surprised if a few more U.S. based coal operators file for bankruptcy protection in the coming days and months.
To Conclude
The U.S. alone will not succeed in this “War Against Pollution” unless other nations also come forward with equal dedication and purpose to lower emissions. The biggest polluter – China – has committed to lower its pollution level beyond 2030 and add more renewables to its electricity production.
But back home, is the Clean Power Plan a last nail in the coffin for the U.S. coal producers? Are we ready yet to sacrifice coal for a cleaner environment? The opinion on this is rather mixed. As much as we would like a cleaner tomorrow, let’s not forget that it was coal that ushered in the Industrial Revolution in the past and still is the most affordable source of meeting modern energy needs.
There is no denying that old and outmoded coal-based U.S. power plants will have to go out of circulation but the utility operators will have to invest in new carbon capture technology to realize the full potential of this cheap and abundant fossil fuel.
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