How to Profit When Power Plants Retire

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

How to Profit When Power Plants Retire

by David Fessler, Investment U Senior Analyst

Tuesday, August 30, 2011: Issue #1589

It's no secret that coal is the dirtiest fossil fuel on the planet.

That being said, it's an essential part of our existence. The world burns more than seven billion tons per year, mostly for electrical power generation.

The United States consumes about 14 percent of the world's total coal production. More than 90 percent of our coal consumption generates 46 percent of our electricity.

There are about 600 coal-fired generating stations in the United States. Most of our aging fleet of plants were constructed between 1950 and 1980. A typical one-gigawatt (GW) coal-fired generating plant burns about 2.5 million tons of coal each year.

According to the Energy Information Administration (EIA), a little more than 50 percent of the plants have pollution control equipment installed.

This minimizes emissions and greenhouse gases that result from burning coal. Another 16 percent have it permitted or already under construction.

Coal's Problem Children

It's the rest of the plants that are a problem. Until quite recently, many of the smaller capacity plants were exempt from the Clean Air Act's emission requirements. But that's no longer the case.

The owners of 33 percent of the coal-fired generating plants in the United States have to decide whether to install this equipment or shut down the plants.

For most of the older plants, it's a no-brainer. They'll be shutting down. It's estimated by the American Council on an Energy-Efficient Economy (ACEEE) that it would cost in the range of $70 to $180 billion to bring these older plants into compliance with current emission standards.

Adding fuel to that fire, the EPA is considering even more stringent emission standards. These would be phased in over the next seven years.

As a result, a number of owners, including American Electric Power Co. (NYSE: AEP), Duke Energy Corporation (NYSE: DUK) and Progress Energy, Inc. (NYSE: PGN), have already made announcements concerning old coal-fired plant retirements. They own a lot of them.

The amount of power that could be "at risk" when these plants close is estimated to be as much as 65 GW of generation capacity. The question is: What do you replace them with?

Crisis and Opportunity Are Inextricably Linked

The problem can be solved easily and with private money. And it will result in electric rates staying more or less the same for customers served by these plants.

Without these solutions, customers could be looking at rate increases of 20 percent or more. Compounding the problem for utilities is the rising cost of coal.

It hit a record high of $130 per ton this past April. That's 30 percent higher than the year prior. As China and India's demand for coal seems insatiable, the price is destined to rise even further.

So how do you replace 65 GW of generating capacity in these conditions? The answer is: You don't have to replace much of it at all. You just need to be more efficient.

What we need to do is go after the big game first. Many of these large industrial consumers of power are sitting with cash-rich balance sheets. Putting some of that cash to work in the name of energy efficiency would greatly benefit their bottom lines.

The largest users of electrical power - big industrial users - need to install combined heat and power (CHP) plants and waste energy recovery systems.

These systems use the waste heat generated by industrial processes to produce steam. This in turn drives turbines connected to generators to produce electricity. This waste heat would otherwise be lost to the atmosphere.

Once the system is installed, it reduces that company's electrical use and its reliance on the utility. It's one of those "win-win" situations.

The economics work out particularly well for industries whose power is supplied with coal-fired plants.

Who Makes Combined Heat and Power (CHP) Systems?

There are a plethora of companies involved in the CHP business. Here are a couple to consider:

  • Capstone Turbine Corporation (Nasdaq: CPST) is a small company that specializes in small CHP plants that range in size from a few kilowatts to a few megawatts.

  • Dresser-Rand Group, Inc. (NYSE: DRC) is a much larger company than Capstone. It designs and supplies very large CHP systems worldwide.

Want further, definitive proof that energy efficiency is really the lowest-cost alternative to coal? Take a look at the chart below from the ACEEE. It depicts levelized costs for various forms of energy generation.

Energy Efficiency Lowest-Cost Alternative to Coal

Energy efficiency is the lowest-cost energy "source"... by a country mile. It can replace all of the electrical generation capacity that will be lost by the old coal plant closures, and it can do it cheaper than any other alternative, including natural gas.

No wonder utilities and large industrial users are getting excited about CHP. Investors who want to take advantage of what's destined to be a surge in the construction of these plants in the next several years could consider either of the two companies listed above. Do your homework before you invest.

Good investing,

David Fessler

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