Declaring War On Coal: Are Dark Days Ahead For This Commodity?

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Includes: KOL, PKOL
by: Energy and Capital

By Keith Kohl

Coal lobbyists are heading back to school in droves, and there's one phrase they're all learning... Ni hao. Those still holding a job will be brushing up on their Mandarin. They don't really have much of a choice in the matter, as long as they're slowly being squeezed off of the U.S. energy platform.

When the EPA dropped a bomb earlier this week concerning limits on greenhouse gas emissions from new power plants, I can only imagine the anger it drew from the coal industry. The new EPA proposal (which you can read in its entirety here) would require new power plants to emit no more than 1,000 lbs. of carbon dioxide per megawatt hour of produced electricity.

Clearly, they had one target in mind with the new regulation. Take a look at emissions from U.S. electricity generation:

Click to enlargeu.s. emissions from electrical generationClick to enlarge

As it stands now, coal plants put out nearly 1,800 lbs. of carbon dioxide per megawatt. For the record, that's double the amount of natural gas plants. The only good news the coal lobby can take home is that the EPA's rule is for new power plants, not existing ones.

Taking this new ruling into account, you can bet the U.S. energy picture will inevitably change:

u.s. energy 4-3Click to enlarge

For years, coal has been considered an important cog in the American energy machine. The sentiment among many was that anyone opposing it for environmental reasons should realize this fact and accept it. While we happen to hold about 23% of the world's recoverable coal reserves, our demand for coal-produced electricity hasn't exactly been growing by leaps and bounds:

US COAL CONSUMPTION 4-3-2012Click to enlarge

As you can see above, coal's share of the U.S. electricity sector is heading in one direction.

In 2001, there were 645 coal-fired plants in the U.S. That number shrank to 594 just eight years later. Fortunately, we finally have a legitimate contender for coal's throne... Less coal means more natural gas.

The latest EPA announcement simply reaffirms everything we've been saying in Energy and Capital about the fundamental shift to natural gas that's taking place today. We didn't have to wait for the governmental press release. If you want proof that natural gas plants are taking over, just look at the EIA data for yourself:

us age of power plantsClick to enlarge

Not only are coal generators going out of style, but the new emissions rule all but guarantees natural gas to be coal's successor. But are tighter regulations really the beginning of the end for coal?

Coal and peat account for 41% of the world's electricity. So the end of the U.S. coal industry doesn't mean the end of coal. Especially when you factor in China.

The Asian Demand Factor

Even though U.S. coal consumption fell 7% during the last decade, demand in Asia and the Pacific has more than doubled. That's led, of course, by the Chinese. Chinese coal demand has tripled within the last ten years. If the United States wants to shut out its coal industry, China may simply pick up where we leave off:

china vs us coal demand

Coal will play a major role for the 2.5 billion citizens of India and China in the decades to come:

China India coalClick to enlarge

And there's one distinct advantage that the coal industry has over natural gas here in the United States... Although the government's message about squeezing coal out of U.S. electricity production was loud and clear, coal producers will be able to ship their product abroad.

Even now, Congress is hinting at banning U.S. natural gas exports. They want to keep prices as low as possible for as long as they can - and that means limiting future LNG shipments. The best part for us is that this shift has opened the door for Canadian LNG stocks to tap into the Asian market.