Trump signed an Executive Order on March 27th that, amongst other steps to eviscerate environmental regulations, aims to block the implementation of the Clean Power Plan promulgated by former president Barack Obama. Regulations associated with the Clean Power Plan have not taken effect to date due to a federal court case filed by 12 states that questioned its constitutionality. The Executive Order is a sop to working class voters that helped him win the presidency. Let's examine this word, "sop," carefully.
"A thing given or done as a concession of no great value to appease someone whose main concerns or demands are not being met."
Will the Executive Order really have any impact on coal mining? Will it save any coal mining jobs between now and the end of the Trump administration in January 2021? Is it an investable thesis for the handful of coal companies that have not filed for bankruptcy such as Cloud Peak Energy (NYSE:CLD), CNX Coal Resources (NYSE:CNXC), and Westmoreland Coal (NASDAQ:WLB)? Will it meaningfully alter the future prospects of the bankrupt, such as Peabody Energy Corp. (OTCPK:BTUUQ)? In a word, as explained below, no.
This Executive Order will prove to be of no great value to the men and women who mine coal nor will it have any meaningful beneficial impact for coal companies beyond some short-term reduction in compliance costs.
The executive order will not alter the current economics of power generation, the inexorable march of technology, the existing social consensus in most states that climate change needs to be addressed, the state level support for renewable energy, and the age and increasing operating costs of the existing coal-fired fleet. All of these factors will contribute to the continued diminution in importance of coal-fired generation during the next three years and 10 months.
There will continue to be pockets of resistance of course to the trend of declining coal-fired generation. Southern Company's (NYSE:SO) Kemper County Coal plant and attempts by utilities in Nevada, Texas and Florida to slow the growth of residential solar are a few anecdotes that show that there will be parties that will fight a fierce rearguard action to preserve the status quo. These initiatives will slow, but not alter, the ultimate outcome. There is no benefit to be gained. It will not achieve its stated objective of restoring coal mining jobs and coal companies to profitability. It is not an investable action.
Natural Gas-Fired Generation
The Executive Order illustrates a fundamental lack of understanding about the factors driving the decline in coal as a fuel in electric generation. The decline in coal began in the mid to late 90s with the development of increasingly efficient natural gas-fired combined cycle generation. It was exacerbated during the last 10 years with a bonanza of low cost natural gas production resulting from fracking and the technological advances made in drilling, advances that are likely to keep the price of the fuel low in the face of increased demand from generation.
A state of the art combined cycle plant now has a heat rate in the range of 6600-6700 btus. If the gas price to the burner tip is $3.50, the fuel cost to operate is around $.02345/kwh. The Energy Information Agency estimates the cost of short ton of 12,500 btu coal (a high btu value) at $51.60. This is an FOB number so cost of transport to the generation site needs to be added, so let's call it $54. The btu content of the coal is higher than average and the delivered cost is probably low, but it still results in a fuel cost estimate of $.0227/kwh for a coal plant with a 10,500 heat rate.
There are other factors that increase the cost of operating a coal plant relative to a gas-fired combined cycle plant including a capital cost that is 3x higher than a gas-fired plant. Coal plants are 50-year assets that require a number of years to conceive, design, permit and build. A board of directors or management team would need to look out at least five years to compare how a newbuild coal plant would compare with other forms of generation.
A comparison of 2022 future operating and capital costs is reflected in the Least Cost of Electricity Analysis in Table 1b on page 7 of this EIA study. The study is quite sobering for fans of coal. On a per MWh basis, a newbuild coal plant costs $139.5 versus $84.8 for natural gas. In fact, coal is the most expensive form of dispatchable generation.
The table also provides LCOE estimates for non-dispatchable generation such as solar and wind on a pre- and post-tax credit basis. It makes for interesting reading. Keep in mind that the costs of solar power are likely to be much lower than forecast as costs continue to decline at a steady rate (sometimes rapid, look at Q3 2016 module costs). The bigger the LCOE spread between coal and solar, the more room to spend on storage options to "firm up" or make solar dispatchable.
Useful Life of Coal Plants
A coal plant has a useful life of approximately 50 years. As the plant gets older, the maintenance costs increase along with down time. The current US coal fleet has an average age (calculated on a per MW capacity basis) of 40 years. It is therefore highly probable that close to half of the existing coal fleet will be retired during the next 10 years. That of course assumes that there are limited advances made in the cost of solar and the cost of battery and other storage; not a bet I would take.
Of the coal plants that will be retired, very few will be replaced by new coal plants. The economics do not justify it and the fuel diversity and dispatchability arguments will wane as more advances are made in wind, solar and energy storage. Some companies will be more aggressive in using renewables to meet their customers' needs. This news release from Xcel Energy (NYSE:XEL) is likely to become more common amongst other utilities over the next five years
Utility managements and independent power producers continue their decisions to shutdown coal-fired capacity. Here are a couple of anecdotes:
Two interesting points from the articles. First, more than 16,000 MWs of coal capacity was retired during 2016. Second, the JEA plant is not yet 40 years old. These types of decisions will continue to be made, and the use of coal will continue to decline despite the Executive Order.
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