The coal industry could be set for another setback as the U.S. Environmental Protection Agency (EPA) is set to formally propose its carbon emission norms for newly constructed coal power plants later this week. While these standards will not be final and are likely to be subject to legal challenges, they pose another threat for the thermal coal industry which is already reeling from lower demand and pricing that were brought about by the availability of cheap natural gas.  We believe that these new standards could have a significant impact on coal producers such as Alpha Natural Resources (NYSE:ANR), and we will be closely watching the developments.
Regulation Of Greenhouse Gas Emissions
Power plants remain the largest emitters of greenhouse gases in the United States, and coal fired plants which produce nearly 40% of the country’s electricity are seen as one of the largest sources of carbon pollutants. A coal power plant emits about 1,800 pounds of carbon dioxide per megawatt-hour (MWh) of electricity generated which is almost twice the amount emitted by a natural gas fired power plant.  The new norms are expected to require emissions to be cut down to close to 1,100 pounds per MWh, translating into a reduction of nearly 40%.  While these standards will initially be applicable only to new power plants, the EPA is expected to outline its greenhouse emission standards for existing power plants by June 2014.
Complying with these new emission standards would require new coal power plants to incorporate carbon capture (CCS) technologies which would increase the price of the plant by close to 25% compared to a traditional coal plant. Natural gas fired plants on the other hand cost about half as much to construct as a new coal plant with carbon capture, and given that the fuel is also relatively cheap, it poses a significant threat to the coal industry.
Coal Fired Generation On The Decline
The EPA already has mercury and air toxin standards in place which require power plants to cut down on their toxic gas emissions. Tighter regulations coupled with low gas prices have seen the share of coal fired generation in the U.S. decline from over 50% a decade ago to about 39% (during the first half of this year).
According to Alpha Natural Resources, much of its thermal coal production is out of the money (OTM) when natural gas prices are under $4 per MMBtu. Gas prices are currently ruling at around $3.6 per MMBtu and this has been reflecting on the company’s thermal coal business. During the second quarter, the company sold 8.8 million tons of Powder River Basin coal, which is about 14% lower than last year while eastern steam coal shipments stood at 7.2 million tons, down 35% year-over-year. Realized prices for both varieties of coal fell by about 4% since last year. While the decline was partially due to the fact that some power plants were consuming out of their inventory, the effects of environmental regulation and cheaper gas also played a significant role. ANR has also mentioned that the impact of regulatory-driven plant retirements have already been quite significant, particularly in the central Appalachian region.Notes: