Coal Regulations Ahead

Coal. It's the energy source we all love to hate for its acid rain, smog, and greenhouse-gas generation, and yet it provides 45% of the electricity that powers the United States.

Clearly, coal is a big, contentious industry. So it's no surprise that clean-air rules proposed by the Obama administration are causing a stir on Capitol Hill.

There are two regulations in question. The Clean Air Transport Rule will set new maximum levels for nitrogen oxides (components of smog) and sulfur dioxide (which causes acid rain). That rule is set to take effect in 2012. Then there's the Utility MACT Rule, which will set limits on mercury and a few other chemicals. The latter rule stems from a court order requiring the Environmental Protection Agency (EPA) to produce a final ruling on allowable mercury levels by November; utilities would have four years to come into compliance.

According to EPA estimates, the rules will cost the coal industry US$10.9 billion.

A report funded by the coal industry puts the costs considerably higher. The National Economic Research Associates (NERA) report, produced on behalf of the American Coalition for Clean Coal Electricity, says the clean-air rules will combine to cost utilities US$17.8 billion annually. That will transfer to consumers in the form of an average electricity rate increase of 11.5% across the country. Industry says the mercury, sulfur dioxide, and nitrogen oxide regulations would lead to the "premature" retirement of coal-fired plants currently generating 47.8 GW of power, which is roughly 15% of America's coal production capacity. That loss would likely be replaced through a 26% increase in natural-gas power generation.

The EPA and the coal industry are also at odds over how the new regulations will impact jobs. The industry says 144,000 jobs will be lost over the next decade, while the EPA estimates employment would increase in the long run.

While the coal industry is vehemently opposed to the new rules, other utilities that have already had to conform to pollution regulations say the rules are needed to level the playing field. Analysts from the Clean Energy Group (which represents other utilities) issued a report in competition with the NERA analysis which said that the costs are manageable and will not make the electric grid less reliable. The Clean Energy Report asserts that 60% of coal-fired boilers already meet the proposed mercury limits; 73% already comply with the rules for acid gases; and 70% are below the levels for particulate-matter emissions.

More importantly, the EPA's main driver in creating the rules is to reduce deaths related to burning coal. The agency says the two rules combined will prevent between 20,800 and 53,000 premature deaths each year, as well as preventing a slew of heart attacks, asthma flareups, and other respiratory illnesses. The EPA estimates the rules will yield up to $140 billion in health benefits.

U.S. Representative John Dingell (D-MI) is asking the EPA to extend the comment period for the new rules to 120 days, double the standard period. His quote sums up the debate pretty well. While admitting that reducing emissions will improve public health and the environment, Dingell wrote that, "[W]e also must be mindful of the economic impact new regulations would have, especially with the complexity and breadth of applicability for this proposed rule being so significant."

Interestingly, the EPA has specifically put lignite coal in a separate category, which means plants that burn the lowest-grade coal will not have to comply with the mercury standards. It is an odd exception, seeing as three of the nation's top five mercury-emitting coal plants in 2009 used lignite. There is speculation that the exemption is primarily a political move - most of the U.S.'s lignite plants are in Texas, so the regulations would increase electricity prices there in an election year.

It's a debate that will be interesting to watch, but not one that we at Casey Research think will be significant with respect to coal equities or the general coal market. The coal markets - both thermal and metallurgical - are very strong and are projected to remain so for the foreseeable future. And with the U.S. Supreme Court having struck down the country's air-pollution standards during the Bush administration, it is likely these new regulations will become policy, so we might as well factor these expenses in right now.

The specter of regulation can cloud an investor's thinking. Marin Katusa and his energy team keep up on this and many other variables in the sector, making it easier to profit. Kick the tires with a subscription to Casey Energy Opportunities; it's risk-free for ninety days.