FRIDAY, December 23, 2011

The WSJ ran a few articles about the MATS rule and its impact on coal.  It highlighted some of the costs of the EPA’s regulations on things like jobs and local tax revenues, some of the things the EPA likely missed in their press conferences. 

How do I look at it?  Different types of generation come in and out of favor all the time.  Nuclear was hot, then it was not (this was when NextEra and Entergy bought a bunch of nuclear plants for a song and a dance), and then it was again.  Combined cycle gas turbines (CCGT) were all the rage10-15 years ago, then gas spiked to $14/mmbtu and they weren’t, leading to bankruptcies and over-capacity.  Now, they’re hot again.  Coal was out of favor during the CCGT period, then became hot when gas spiked to $14, now with gas at $3.50 and the EPA continuing its frontal assault on coal, it's once again dead. 

Call me crazy, but I’ve seen these cycles before.  We’re already seeing increasing M&A activity for fully remediated coal plants by those with foresight and a knowledge of trends.  Sorry, natural gas is not going to remain below $4.00 forever.  Next year, maybe, given the overhang of storage, but not forever.  Recall that the same predictions, that gas will remain below $3.50 through 2010, were being espoused in the late 90’s, which led to the CCGT build-out.  That didn’t work out too well.      

Unfortunately, the bad news for coal remains front-and-center and the EPA may not yet be done.  There are still the coal combustion residuals (ash) rules and the cooling water intake structures rule, which are expected to be addressed by the EPA in 2012.  While we are hearing these will be light-handed, there is no way to say for certain.   If the EPA is satisfied with shutting about 20% of the coal plants currently operating, it may decide to back off.  If not watch out.