The Environmental Protection Agency is in the process of updating its mandates for coal- and oil -fired power generation plants. As the restrictions imposed upon those plants are tightened, changes will probably be felt across the U.S. energy industry. At the moment, there are approximately 1,350 coal- and oil-fired plants currently in operation (about 600 of which are strictly coal fired). Some companies have updated most of their generation sites and should have no problem complying with the new standards. Meanwhile, others have let their sites become outdated and will no doubt voice their distaste for government imposed expenditures, stating that the rise in costs would make some locations unprofitable and economically unviable.
The Clean Air Act was passed in 1963. It is a U.S. federal law that was created to control and limit air pollution on a national level. In 1990, the Clean Air Act was amended to give the EPA control over mercury and other hazardous air pollutants. This prompted the EPA to perform a lengthy analysis of key Midwest power plants. They chose those locations due to the prevailing winds of our country, which flow from West to East, in turn, carrying contaminants released there with them. By focusing on the toxins leaving those plants, the EPA was able to establish a starting point for where pollutants enter the environment. That data was then cross referenced the readings from eastern locations to get an approximation of the level of pollution created by them. The results of this analysis deemed contaminant levels to be hazardous enough to threaten the public’s general welfare, warranting regulation on coal- and oil-fired electric plants.
Meanwhile, on July 6, 2011, the EPA finalized its Cross-State Air Pollution Rule, which will require 27 states to significantly improve air quality by reducing power plant emissions that contribute to health problems and ozone issues in other states. This rule will affect roughly 900 coal-fired, natural gas-fueled, and oil-burning power plants. Emission levels will have to be slashed by 2014. More specifically, nitrous oxides and sulfur dioxide must be reduced by 54% and 73%, respectively, from the 2005 levels.
In conjunction with this, the EPA is also trying to reduce the amount of mercury released into the atmosphere. This pollutant can be particularly damaging because of mercury’s tendency to bioaccumulate in the food chain. As electric generators burn coal, mercury that is released into the atmosphere can fall up to 30 miles away depending on the height of smoke stacks. When these and other contaminants make their way into streams and rivers, through rain-water runoff, it is only a matter of time before they get into the food chain. Plants and small fish absorb the mercury as it contaminates their water supply. As larger fish like sea bass and tuna eat the smaller fish, the mercury levels increase until, at some point, it makes it onto our tables. This trend has caused the U.S. Food and Drug Administration to issue advisories recommending that pregnant or nursing women and young children limit the amount of certain fish they ingest, such as, tuna, swordfish, and shark.
At the moment, the estimated cost to reduce contaminants is approximately $800 million annually for the cost of implementation plus another $1.6 billion per year in capital expenditures by utility companies until older plants have been updated with new cleaner technology. With the prospect of costly expenditures needed to retrofit outdated and less-efficient power plants, it is of little surprise that many of the plant operators are opposed to these changes. Some are even stating that requiring them to effect these changes will make some plants no longer economically viable. This, in turn, will result in certain locations being closed down, with a consequent loss of jobs. Some opponents of the policy shift, namely the American Coalition for Clean Coal Electricity, are claiming that 1.4 million jobs would be lost by 2020 as a result of the recent Cross State Rule and the mercury emissions rule. However, those in opposition to this statement say that the older outdated plants have already made plenty of money over the years, and that their initial costs have been amortized multiple times. Therefore, if certain operators want to continue to run a profitable business, these upgrades are needed and should not be foregone to the detriment of the environment. Over time, these efforts are anticipated to save roughly $280 billion because of reduced healthcare costs. The EPA predicts that for every $1.00 spent on reducing pollution from power plants, the American public and businesses will see up to a $13.00 return in the form of health and economic benefits. Moreover, jobs would no doubt be generated by the retrofitting process.
Combined there are 56 energy companies covered by Value Line. They are located across the Western, Central, and Eastern United States. Many of the stocks offer above-average dividend yields when compared to all 1,700 companies in the Value Line universe. However, in the years to come, as regulations get tighter, some of these companies may be forced to scale back their payout ratios. Most regulated power generators should be able to recover the compliance costs by passing them onto customers through rate hikes. However, non-regulated plants, which are subject to market prices, may find themselves in a more precarious situation. Many in this space already have been dealing with tighter margins as lower power prices and higher coal and transportation costs affect profitability. The increased regulations imposed by the EPA may be a catalyst to changing this industry’s landscape, for the better in some company’s cases, and for the worse, in others.
Investors looking for income generating plays would be wise to focus on individual utility companies that have already updated the majority of their generator facilities, and would, thus, be less affected by the new mandates. Conversely, it may be wise to stay clear of companies with older outdated plants.
At the time of this article’s writing the author did not have positions in any of the companies mentioned.