Natural gas is the favored fuel of the day, with solar and wind close behind. That leaves coal as the odd man out. Regardless, the United States won't be able to remove coal, which accounts for about 40% of U.S. electric power, from the energy equation any time soon.
"It would be stupid..."
The Southern Company (NYSE:SO) is in the process of building a coal power plant using coal gasification and carbon capture technology to produce "clean" energy. The plant is a test case of potentially transformational technology. It will also diversify Southern's Mississippi Power unit away from an over reliance on just one fuel source.
That division generated about 75% of its electricity from natural gas in 2012, with the rest coming from coal. The reason? Coal cost the company 5.09 cents per kilowatt hour versus natural gas' cost of 2.9 cents. Five years earlier, however, those roles were reversed. Coal provided almost 70% of the division's electricity and cost 3.52 cents per kilowatt hour. Gas provided the rest, but cost 6.83 cents per kilowatt hour.
Although gas prices are relatively low today, extending that into the indefinite future is a bad business decision. If natural gas costs went back to 6.83 cents per kilowatt hour, Mississippi Power's fuel costs would increase more than 100%.
Former Mississippi governor, and a current lobbyist for Southern, Haley Barbour recently summed it up nicely when he told Bloomberg "It would be stupid to be reliant 80 percent on one fuel." That's true across the entire industry. Cutting out coal would create just that situation.
Too expensive? Unfortunately for Southern, the construction of the plant is costing more than expected. Write-offs will be a drag on results this year and perhaps next, since the plant isn't expected to open until 2014. The thing is, the technology behind this plant is new and largely untested on a large scale. There are always issues the first time you do something. Southern is taking a calculated risk.
However, the facility has some unique benefits. For example, it is located next to a coal mine that Southern owns, reducing fuel costs materially. Second, it is near an area that will buy the carbon it captures, turning an environmental headache into a potential revenue source. Look for coal to become a more important part of Mississippi Power's business after 2014 with the new plant providing decades worth of low-cost power.
Into the future This plant, however, isn't the only advance being made in clean coal. Late last year the U.S. Department of Energy announced that Ohio State University researchers had developed a "groundbreaking new hybrid membrane" that could effectively capture carbon dioxide. Still, getting from the lab to the real world isn't easy, as Southern's cost overruns show.
But the research proves that coal isn't dead yet. In fact, new rules being put out by the U.S. Environmental Protection Agency (EPA) could actually help coal in the long term. The stringent targets it announced will create concrete goals to hit, focusing the research effort.
Here and now Coal remains unloved. That's potentially good news, however, because the President and the EPA haven't hidden their intent to regulate emissions from power plants. So the "bad news" is largely priced into coal miners' stock prices. For example, Rhino Resource Partners, L.P. (NYSE:RNO) is down around 10% so far this year, Cloud Peak Energy Inc. (NYSE:CLD) is down about 20%, and Arch Coal Inc (NYSE:ACI) is down in the 30% range.