Obama Climate Push Spells Further Trouble For Coal

By EnergyFOXBusiness

President Barack Obama on Tuesday unveiled a push to implement new carbon dioxide emissions standards, a move that could send a shockwave through the energy industry.

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He also indicated the Keystone XL pipeline would only be approved if it doesn’t “exacerbate the problem,” leading some analysts to suggest the project will ultimately move forward.

The most significant development in President Obama’s speech on environmental policy is the potential for carbon restrictions on existing coal-fired power plants. The Environmental Protection Agency proposed rules related to carbon limits for new power plants last year.

But questions remain over whether such regulations will pass muster in court, where similar EPA rules have been successfully challenged.

Opponents have argued that the Clean Air Act, under which the EPA draws up pollution standards, wasn’t created to regulate carbon dioxide. The EPA paved the way for regulating carbon dioxide when, in 2009, it determined that “greenhouse gases” are harmful to human health and the environment.

The Clean Air Interstate Rule was set to require 28 eastern states to significantly reduce nitrogen oxide and sulfur dioxide emissions in a cap-and-trade system. A federal court ordered the EPA to make changes to it, and the agency eventually rewrote the rule as the Cross State Air Pollution Rule (CSAPR), referred to phonetically as “Casper.”

Casper suffered a similar legal fate, as the U.S. Court of Appeals for the District of Columbia vacated it for going beyond the EPA’s powers under federal law. The court ordered the EPA to continue enforcing CAIR until it worked out a new rule. The Supreme Court has agreed to take up the case, defying opposition from 14 states, utilities and the United Mine Workers of America.

If implemented, the new proposals announced Tuesday would spell trouble for a coal industry already under pressure from cheap natural gas.

“If regulations occur on existing plants, it could further shrink the coal industry,” said Jim Rollyson, an analyst at Raymond James.

Coal Battling Multiple Fronts

The coal industry’s move to reduce sulfur emissions was a gradual process. It started with using coals that burn off less sulfur, before moving on to the installation of pollution-control equipment, called scrubbers.

“That’s the correct way to do this,” Rollyson said. “Even if you philosophically agree with the administration, the timeline has to change. There needs to be a longer runway to promote the switchover. The EPA is going crazy to put these things in place in a short amount of time, but you can’t just shut down plants that don’t have the technology to deal with carbon.”

He added that carbon emissions standards on power plants will “dramatically increase costs for everybody,” including coal companies, utilities and consumers, if the industry isn’t allowed to move at the most economically efficient pace.

U.S. coal producers could theoretically look to export more coal in the wake of restrictions on existing power plants, but prices in other regions aren’t conducive to exports.

“What’s stopping exports right now is global prices are relatively low,” said Marie Shmaruk, a credit analysts at Standard & Poor’s. “When natural gas prices are low, it has a detrimental effect on coal prices.”

EPA rules on existing plants would likely lead to high-cost production coming off line, Shmaruk added, particularly in the Appalachians where producers have already cut capacity.

Also threatening the potential for higher coal exports is the possibility of regulating the shipment of coal to other countries. Shmaruk noted that restrictions at West Coast ports have held up export plans.

While there is room for coal exports to grow, recent numbers show a record amount of coal being sent out of the U.S. According to the Energy Information Administration, coal exports hit a month peak in March with 13.6 million short tons. The EIA is projecting a third consecutive year of more than 100 million short tons of coal exports in 2013.

Given that the industry is trending toward greater exports, Rollyson said the proposed rules for existing power plants could have little net impact on the environment at the expense of the industry and the economy as a whole.

“We tend to look at the U.S. as an island. China is emitting 50% more carbon dioxide. Assuming you buy into the science, are you benefiting the globe if guys like China and India aren’t willing to play ball?” Rollyson said.

And by limiting exports, regulators could further take away economic benefits and squeeze coal producers, he added.

For now, coal’s struggles are largely a function of natural gas prices that have slid 6% on the year. Natural gas was trading Wednesday afternoon at $3.70 per 10,000 million British thermal units.

Coal stocks have suffered as well. Alpha Natural Resources (NYSE:ANR) is down 35% over the last 12 months, while Peabody Energy (NYSE:BTU) has slid nearly 45%.

“Stocks have been hammered for two years now. I want to find reason to own coal. I’d love to say buy them, but there aren’t a lot of catalysts,” Rollyson said. “There are no major catalysts likely to come up in the short term, but maybe there’s a little recovery if greenhouse-gas standards don’t go through.”

Natural Gas Next On Obama’s List?

The U.S. shale boom, especially production at the Marcellus Formation in eastern Pennsylvania, has led to substantial supplies of natural gas, driving down prices. Like the coal industry, natural gas producers are increasingly looking to export gas to fetch higher prices abroad.

Applications that would allow for the export of liquefied natural gas have been met with delays at the Department of Energy, something ExxonMobil (NYSE:XOM) Chief Executive Rex Tillerson openly criticized earlier this month.

On Tuesday, President Obama characterized natural gas as an energy source that will be used to “transition” away from coal to renewables. He also called for eliminating tax breaks for oil and gas companies.

“The president recognizes the important role natural gas has played in reducing CO2 levels to near 20 year lows, thanks to private investments in energy exploration, production and refining,” said Jack Gerard, President and CEO of the American Petroleum Institute, noting that America has become the world’s largest producer of natural gas.

“But by recycling his plans to raise taxes on U.S. oil and natural gas companies, President Obama runs the risk of unwinding the significant environmental benefits from natural gas, threatens our economic recovery and dampens our ability to create millions of jobs for Americans.”

Michael Ferguson, an associate at S&P who covers renewables, noted that the economical way to achieve the president’s objective of reducing carbon emissions is through low natural gas prices. However, President Obama’s call to then move away from natural gas puts greater focus on the disagreement over funding for clean energy between budgets proposed by the administration and Congress.

“There was a lot of talk about President Obama acting unilaterally on coal. If renewables are part of the plan, there must be a congressional approach,” Ferguson said, adding that to date, Congress has continued to renew funding.

Utilities, Electricity Bills At Risk

In addition to the impact on energy producers, the plan for limiting carbon emissions would change the way Americans consume electricity.

Coal produced 37% of electricity in the U.S. last year, below levels seen before the natural gas boom.

Without coal, either stemming from carbon restrictions or low natural gas prices, natural gas would bounce back up and add to consumers’ electricity bills.

“If gas prices stay depressed, there could be 25% reduction in the coal fleet. That’s a detriment to consumer,” Rollyson said.

Utilities are at risk as well. Kyle Loughlin, a managing director at S&P covering regulated utilities, said that while there are no near-term implications on credit quality for utilities, costs associated with regulations may become a negative development.

“The presumption is that there will be further closures as a result of limits put on carbon emissions,” S&P director Gerrit Jepsen added.

S&P keeps a close watch on whether local regulators are supportive of their utilities.

Loughlin said regulators care about reliability and rates, and their role is to have oversight of the relationship between utilities and customers. He said there is an expectation that costs associated with further environmental regulations would be passed down to consumers.

Further efforts to curb emissions would make utilities higher-cost operators and potentially “makes for a somewhat more difficult relationship” between them and regulators.

“The U.S. refused the Kyoto treaty because we knew of the cost. Those countries that are supposedly ahead of the curve are going the other way now, back to coal. Germany is getting rid of nukes and building coal plants,” Rollyson said.

Keystone Still Pending

Meanwhile, a decision on TransCanada’s (NYSE:TRP) Keystone XL pipeline is still waiting in the wings. Obama’s remarks Tuesday led some to speculate that the project will be given the go-ahead, given that the State Department found no negative impact from Keystone.

“Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation’s interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution,” Obama said. “The net effects of the pipeline's impact on our climate will be absolutely critical to determining whether this project is allowed to go forward. It’s relevant.”

Kevin Brook, an analyst at Clearview Energy Partners, reaffirmed in a note to clients Monday that he believes an effort to further cap carbon emissions is a sign that Keystone will ultimately be approved.

He said the administration is continuing its “give a little, take a little” energy and environment policy—giving environmentalists limits on existing coal-fired power plants in exchange for Keystone.

“We may be contrarians by nature,” Brook wrote, “but our original reasoning still holds: action on climate issues—or even a clearer articulation this week of planned actions yet to come—could collateralize (and foreshadow) eventual approval of the pipeline.”

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