A few days ago Barack Obama made a major policy address on climate change and the actions he plans to take to force the nation to produce less carbon going forward. This topic, while extremely controversial, is also important for investors to thoroughly understand as the new regulations Obama proposed include new restrictions on coal power plants, changes to truck emissions policies, and new EPA directives for the future.
Now climate change and EPA regulations are obviously an intensely political topic, but I am going to do my best in the course of this article to stay out of the realm of politics and instead focus on what the new changes in regulation will mean for various sectors of the economy. In particular, regardless of whether you like or dislike Obama, and whether you agree or disagree that more regulations are needed to slow carbon dioxide emissions, it is clear that not all of Obama's proposed agenda will be enacted.
Obama's plan will undoubtedly face intense scrutiny from industry sources in the form of lobbying, lawsuits, and attempts to find loopholes in any regulations put forward by the EPA. As a result, any realistic observer has to expect that some of Obama's agenda will never be implemented, some of it will take years to be implemented, and some of it could be impacting firms as soon as next year.
With that in mind, let's talk about what Obama is proposing and who the winners and losers will be.
Losers: Coal Utilities
The most ambitious part of Obama's plan involves a regulatory assault on coal-fired power plants. Obama says he will direct the EPA to create the first federal limits on the emissions from coal plants, something that will have a major impact on several industries. These new regulations would be part of the 2014 EPA Greenhouse Gas Standard. The administration has indicated it hopes to have a draft rule in place by 2014 and a final rule in place by June 2015.
Companies like American Electric Power (AEP), Dynegy (DYN), and FirstEnergy (FE) would all be negatively impacted by these regulations if they are passed. However, even if the regulations are passed, the effect will be less negative for these firms if they are given a long phase-in period before the regulations take effect. Consistent with this, AEP CEO Nick Akins said earlier this week that as long as utilities like his are given enough time to transition to a cleaner fleet of power plants, Obama's plans can be carried out "without major impact."
Nonetheless, since the EPA directives aren't laws and don't have to be approved by Congress, this portion of Obama's plan stands a good chance of being implemented and will certainly hurt coal utilities such as Southern Company (SO), Duke Power (DUK), and PPL (PPL). Indeed recent statements by utilities execs confirm as much.
Losers: Coal Miners and Mining Equipment
Along with coal utilities, coal companies are going to take yet another hit on the chin from the new regulations. Even if utilities companies ultimately keep most of their existing plants by upgrading the pollution controls on them, it is very unlikely that new coal power plants will be built in this country in the future. Coming on top of the uncertainty out of China, and the initial approval for LNG plants to ship natural gas to Europe (presumably replacing some coal there), Obama's announcement couldn't have been timed to be any more damaging to coal miners. Companies like Peabody Energy (BTU), Alpha Natural Resources (ANR), and Arch Coal (ACI) have all seen dramatic stock price declines around this news. Mining equipment stocks like Joy Global (JOY) and Caterpillar (CAT) also have been hit as their future sales of equipment to coal miners will likely decline.
Winners: Non-Coal Utilities
In the winners category, one obvious group is the non-coal utility companies. Obama's initiative will raise costs for consumers, which will make non-coal power from companies like Exelon (EXC), Calpine (CPN), and Entergy (ETR) more attractive. These companies produce power from nuclear power plants, from natural gas, and from some renewable sources all of which will likely benefit in the wholesale power markets once the regulations are in place. Smaller utilities with significant nuclear plant portfolios like Scana (SCG) and Great Plains (GXP) may also benefit.
Winners: Alternative Energy and Natural Gas
Another obvious group of winners are firms that make components for renewable energy generation. These groups will benefit doubly - first from a shift away from coal, and second from Obama's proposal to increase spending on clean energy. While this second element may or may not ever be implemented, the shift away from coal is highly likely to occur. This will aid the likes of First Solar (FSLR) and Solar City (SCTY), while also providing a small boost to big conglomerates that make equipment for solar farms including General Electric (GE) and Siemens (SI). Even Berkshire Hathaway (BRK.B) may benefit slightly given the increased investment in solar energy there lately.
Natural gas firms will also be likely to see some benefits here particularly if the new criteria for making decisions based on the "climate change impact" leads to increased approvals of LNG plants. This would help companies like Chesapeake Energy (CHK), Exxon Mobile (XOM), Cheniere Energy (LNG), and construction firms involved in building LNG plants like Fluor (FLR) and KBR Inc. (KBR).
Winners: Home Improvement, Consultants, and TransCanada
Among less obvious, winners Home Depot (HD), and Lowes (L) could see some increased sales from remodeling and window replacements if Obama's plan to incentivize homeowners to improve their energy efficiency actually gets off the ground (again this is an iffy proposition in my view as I doubt Congress will be excited about spending the money). Whirlpool (WHR) would also be a particular beneficiary as there is some possibility of additional tax credits for consumers purchasing energy efficient appliances.
Further, with the energy industry gearing up to fight the new regulations it is likely that consulting firms like Navigant (NCI) will see increased business in creating reports to aid lobbyists and industry.
Finally, and this will be controversial, I think TransCanada (TRP) may be a winner here. Obama said that he would only approve the firm's Keystone XL pipeline if it does not have a significant impact on carbon emissions. Immediately thereafter the Canadian government came out and said it wouldn't have an impact, and this is backed by the State Dept.'s findings on the matter earlier this year. While the EPA threw a fit when the State Dept. said that Keystone wouldn't be bad for the environment (because the oil will come to market one way or another), it's going to be hard for Obama to buck both the State Dept.'s view and the assurances of the Canadians. As such, I think this speech may help give Obama cover to approve the Keystone pipeline, particularly with the added rationale that it won't hurt emissions control efforts.