Just over a week ago, American Electric Power (NYSE:AEP) reportedly agreed to terms with the Environmental Protection Agency (EPA) to retire two coal plants in Oklahoma. Supposedly this agreement is needed for AEP to meet the federal mandates on regional haze.
The agreement as reported is that AEP will retire and replace a 460 megawatt plant by 2016 and spend roughly $175M to install equipment on the other plant that will reduce toxins until it is retired in 2026.
10% Rate Increases
The headline news all sounded good until digging into the meat of the article. The significant fact was that the agreement would cause a 10% rate increase to utility consumers.
Even worse, towards the end of the article, we see that AEP is in the process of preparing ratepayers for 10 to 35% rate increases. Apparently the 10% rate increase is only the best case scenario.
Wait a minute -- so consumers have agreed to replace coal fired plants, presumably with natural gas, at the cost of up to 35% in rate increases? Have you heard that many Americans say they are more concerned about haze than paying their bills?
Evidently the deal isn't final until public review and comment, so it begs the question of whether this plan will ever be implemented. Not only will consumers get hit with a huge rate increase for the switch, but since this switch is happening all across the US the real risk exists that by 2016 natural gas prices will be much, much higher.
Over 100 Announced Coal Plant Retirements
According to the Huffington Post, the Beyond Coal campaign has been responsible for over 100 announced coal fired plant retirements since January 2010. It has also prevented the building of 166 proposed new coal plants from being built, since 2002.
Naturally a lot of these retirements come from plants that needed to be retired, so a big part of the issue is the inability to build new, more efficient coal fired plants.
Remember, coal has traditionally been the cheapest fuel source while natural gas pricing can be very volatile. Sure, shale drilling has changed the supply landscape, but if over 100 utility plants are switched from coal the natural supply and demand economics might be thrown off.
Natural Gas Demand To Soar
Also, the nation is busy working on numerous plans to utilize cheap natural gas including switching to electrical vehicles, utilizing natural gas as a fuel for vehicles, and exporting natural gas to foreign countries. Not to mention, plans are in the works for several chemical plants to be built in the US that will use cheap natural gas as a feedstock.
Does that sound like a scenario conducive to cheap natural gas supplies perpetually into the future? Considering both fuels have abundant supplies, it isn't logical that the US doesn't have a energy policy to utilize both to ensure continuous cheap supplies well into the future.
Domestic coal stocks have been decimated over the last year, due mainly to cheap natural gas and the threat of utilities switching. Based on these numbers from AEP in Oklahoma, it just doesn't appear feasible that most of these plants continue forward with decommissioning. It sounds great to improve the environment, but how many consumers can afford to pay even 10% more for electricity? What company will go out of business if costs increase 35%?
The fears of coal being phased out are drastically overdone at this point. Leading domestic coal producers such as Peabody Energy (NYSE:BTU), Cloud Peak Energy (NYSE:CLD), and Alpha Natural Resources (ANR) should be bought on this extreme weakness. Most coal stocks are down 50%+ even though coal remains the dominate global fuel choice.
Honestly, it doesn't matter which coal stock you buy as all will move in tandem. Peabody Energy is best of breed if you want the more conservative pick. Cloud Peak is more focused on thermal coal if you expect utility use to rebound. Alpha Natural has the 3rd largest reserves of metallurgical coal in the world so it makes the better investment if steel demand rebounds.
In the end, if the US doesn't want coal, domestic coal will eventually find profitable routes to Asia where China and India can't import enough of the cheap fuel.
Disclosure: I am long ANR.
Additional disclosure: Please consult your financial advisor before making any investment decisions.