Cutting Coal: It's More Than Just Clearing the Air

It’s massive cost savings for America’s utilities, which means more investment for a reliable grid.

Next time you visit a monument or statue made of stone, take a close look at any lettering you see. Chances are it will look faded and eroded. And you can blame the illegibility on acid rain: The product of unrestrained emissions of nitrous oxide and sulphur oxide from burning coal to generate electricity.

SOX and NOX emissions were identified decades ago as contributing to corrosion of stone structures, roofing of buildings, automobile chasses and pretty much everything in between. When President Nixon signed a 1970 executive order creating the Environmental Protection Agency, America acquired a way to monitor it. And in 1990, President Bush signed the Clean Air Act Amendments, giving EPA the teeth to stop it.

When CAAA passed Congress, the coal mining and power generation industries prophesied general economic ruin from spiking electricity prices—the result of having to install “scrubbers” on facilities to comply with the Act. That didn’t happen.

The steps taken to reduce SOX, NOX and particulate matter from emissions, however, did increase the cost of operating coal power plants. So did later regulations to control mercury emissions, which were starting to find their way into water supplies at potentially hazardous levels.

Burning coal to generate electricity also leaves coal ash as a byproduct. Utilities for decades stored the ever-growing volumes in large pits to prevent toxins from leaching into the soil and from there the water supply. But a little over 10 years ago, one of the largest—a North Carolina facility owned by a unit of Duke Energy (NYSE: DUK)—ruptured and spilled 39,000 tons of coal ash into the Dan River. And as a result, remediation of coal ash pits and spills has added billions of dollars more to the effective cost of burning coal to generate electricity.

20 years ago, US utilities contemplated building some 108 large coal-fired power plants. Unlike the aging fleet built in the 1950s, 60s and 70s they were intended to replace, the new and far larger facilities on the drawing board were designed to use technology that would gasify the coal—thereby eliminating the particulate matter, acid rain gasses, mercury and other traditional byproducts of burning coal.

But only two of these IGCC plants were ever built, one in North Carolina and the other in Indiana. One big reason: The shale revolution revived natural gas production in the US, rendering coal gasification hopelessly uneconomic by comparison. As utilities built more natural gas-fired power plants, they were able to shutter the aging coal power plant fleet, slashing operating costs and passing the benefit onto customers as lower rates. And the investment added to rate base, which lifted earnings.

As a result, coal’s share of US electricity generation dropped from 51 percent in 2001 to 39 percent in 2014, and to less than 20 percent by 2022. Prior to the 2022 passage of the Inflation Reduction Act, the Energy Information Administration projected coal would be less than 10 percent of US generation by 2030. And despite challenges to some regional grids from an explosion of electricity demand from AI-enabled data centers, the new end-of-decade projection is for a market share as low as 4 percent.

That’s quite a decline and fall for King Coal. And as has been the case since 2001, the primary driver remains basic economics. Mainly, utilities and other power producers can cut costs and boost earnings by shutting their aging coal-fired facilities and replacing them with other sources.

Bloomberg Intelligence, for example, projects five coal-heavy Midwest state utilities have an investment opportunity worth $9 to $12 billion from retiring and replacing 27 gigawatts of currently operating coal plants—and “with no impact on customer bills.” According to the analysts, “every dollar saved in nonfuel operating and maintenance expenses by closing labor-intensive coal plants can support (an additional) $6 to $8 in capital spending.

At a return on equity of 9.5 percent—a level in line with national averages—that’s an additional 29 to 38 cents per share for earnings. And it represents 18 to 23 cents in dividend increases assuming a conservative 60 percent payout ratio.

Odds are heavy much of this retired coal generation will be replaced with renewable energy, mainly because the vast majority of solar, onshore wind and energy storage projects can be sited, permitted, financed and built within 12 to 18 months at the outside. That enables companies to lock in costs with far greater precision than they can for multi-year projects such as nuclear and offshore wind facilities.

At a time of “higher for longer” interest rates, global supply chains threatened by rising trade protectionism including in the US and growing politicization of energy, that’s an advantage non-renewable energy sources simply can’t match. And that’s even before adding in state and federal tax credits and subsidy.

And thanks to a surge in electricity demand from AI-enabled data centers, regulators of regional power grids—particularly the PJM (Pennsylvania, Jersey, Maryland)—utilities switching from coal have a new advantage. That’s significant new latitude for management as to the timing of closings, with officials now authorizing delays to ensure grid integrity while replacement sources come on line. And the result is massive potential savings from new flexibility timing the actual work of shutdowns, reduced losses from writing down the book value of facilities and less ratepayer impact from securitization of costs now allowed in most states.

Of course, it would be a mistake to count out King Coal altogether. Even 4 percent of US power generation is still a very big number. And the remaining mining companies are still finding eager markets overseas, even as they continue to improve efficiency, eliminate and boost investment in natural gas.

As for natural gas, at last count it provided more than 30 percent of overall US energy and fueled more than 43 percent of power generation. And according to EIA, the fuel still won’t have reached peak consumption in this country by 2050, even under the most aggressive renewable energy growth forecasts.

“All of the above” sourcing of generation is still the best way for power grids to provide abundant, affordable and clean electricity—just as it’s been since Edison threw the first switch in the 19^th century. But as America’s massive ongoing switch from coal shows, clearing the air can be profitable too.