On Wednesday, the Environmental Protection Agency (EPA) issued its list of top greenhouse gas emitters from 2010.
Of the top 100 emissions sources, 96 were power plants, virtually all of them coal-fueled.
The EPA recently developed new air emissions standards to curb pollution. This follows a 2007 U.S. Supreme Court decision that ruled greenhouse gases can be regulated under the Clean Air Act.
This week's report will provide more ammunition for the EPA to move on air quality standards.
But the EPA is not just targeting carbon dioxide levels. As I have discussed previously, new interstate air standards focusing on mercury, nitrous, and sulfurous oxide emissions will likely have a more immediate impact on coal's prospects in generating electricity.
Even without a renewed EPA push, coal's prospects were diminishing.
Even though it remains the cheapest fuel for power production on average, the environmental impact looms large.
And then there are the enormous reserves of unconventional gas that will capture portions of coal's market share. The sources are primarily from shale basins, but they also include the rising production of coal bed methane and tight gas that have exploded onto the market in the last several years.
This gas largesse has put the cost advantage of coal into perspective.
With that gas supply now guaranteed, and the price differential between the two fuel sources narrowing, there are few genuine prospects left for renewed interest in building either new coal-fired plants or even co-fueled ones (that could make use of both coal and gas).
The advent of some tax incentives and government subsidies will result in a few coal-to-liquid (NYSE:CTL) plants. But despite the PR push from the coal industry, CTL is not a cost-effective solution once the umbilical cord of public sector money is withdrawn.
All of this is happening at a pivotal point in the development of the national grid.
And that is why investors need to understand what it means for the future of both coal and natural gas.
This Graph Says it All
Back in late September, I addressed a meeting of Western power-company executives held in Pebble Beach, Calif.
One of the slides I presented to them tells us everything about the future of coal and natural gas.
Take a look.
As you can see, new electricity capacity is turning quickly to natural gas, with coal suffering most for the change. By 2020, some 90 gigawatts (GW) of coal-fired capacity will be "retired."
The EPA's non-carbon standards could easily add an additional 20 GW to that total. My current baseline estimate is a projection of 30% to 35% of additional natural gas use in the power sector within the next eight years.
This is why those EPA mercury, nitrous, and sulfurous oxide standards are rather significant. They require a 90% cut of mercury and a 52% reduction in nitrous oxides by 2015, along with an 80% cut to sulfurous oxides by 2018.
I am projecting that additional major coal-fired plants in 17 states will be affected.
Republican candidates and Congressional leadership are arguing that the EPA standards – both carbon and non-carbon – will hurt corporate development and employment, as well as lower the prospects for ready energy essential to a continuing economic recovery.
Yet, the balance of analysis indicates that the replacement of coal with gas will not result in any major dislocations on a national level. Of course, the case regionally is quite different, which is why most areas adversely hit will probably end up seeing existing major power plants grandfathered by legislative action.
That buys time and softens the local blow.
It does not, however, reverse the imminent trend.
The EPA Will Move Quickly
In 2008, Congress gave the EPA explicit instructions to develop stricter standards sooner rather than later. The results of this year's elections may delay that somewhat, depending on the makeup of both Congressional chambers once the political smoke clears.
But a reversal of the trend to enforce clean air standards is very unlikely.
This has become a global move, with even the heaviest polluter (China) admitting it has a problem and committing to the use of gas over its massive domestic poor-quality coal. Coal will remain the primary choice in Asia (China, for example, must put a new decent-sized power plant on line each week to meet rising power demands).
However, coal's market share has been reduced. This is even the case in Germany, where a decision to phase out nuclear plants has placed more emphasis on gas and less on coal.
All of this points in the same direction.
The EPA report simply reflects the change in direction.
The agency is hardly driving it, and the ability to delay implementation of new standards will only delay what is coming anyway.
Coal will remain a major power source in the United States.
And it is still essential for essential processes like steel production and a range of industrial and heating uses.
However, over time, it will not return to its position as the main driver in the electricity market.
And investors need to plan accordingly.