Tuesday, April 04, 2017

Coal Redemption in The Natural State

The March 27th article “Carbon Culprit” described technologies under development that may be able to redeem coal from its position as the worst of the worst greenhouse gas emitters.  Pulverized coal has been touted as one possibility.  Thermal coal is crushed into a fine power of a consistently similar to cosmetic makeup.  It is blown with heated air into the firebox of the furnace used in a coal-fired power plant.  This leads to far more efficient use of furnace capacity and reduces the amount of coal that has to be burned for the same power generation. 
Estimates suggest using pulverized coal could reduce lifecyle greenhouse gas emissions by four times to as low as 250 grams per kilowatt hour.  At this level coal would still be among the worst carbon emitters, but would be far more acceptable in those regions where low carbon emission alternatives are not available.

American Electric Power (AEP:  NYSE) is among the power producers that relies heavily on coal.  At least 50% of its generating capacity is from coal-fired power plants.  The last coal fired plant AEP built is the Turk power plant in Arkansas, which is touted as the most advanced coal-fired power plant in the U.S.  Commissioned in 2012, the 600-megawatt plant uses pulverized coal to fire an ‘ultra-supercritical’ boiler.  On top of these two efficiencies, AEP has installed a selective catalytic reduction (SCR) system, low nitrogen oxide (NOx) burners, a dry flue gas desulfurization (FGD) system, a ‘baghouse’ for sulfur dioxide and particulate control, and an activated carbon injection to reduce mercury emissions.  The company claims dramatically reduced greenhouse gas emissions resulting from more efficient use of coal feedstock and the many layers of emissions control. 
The plant required an investment of $1.8 billion, implying a cost of $3.0 million per megawatt of annual power production at maximum utilization.  This seems like an expensive price tag, especially in comparison to some of the most recent advanced in renewable energy technology.  Cost of operation for the Turk plant may also raise some eyebrows.  Arkansas is near coal country, but AEP has chosen to source its coal from low-sulfur supplies of the Powder River Basin in far away Wyoming.
The Turk site is likely to be AEP’s last coal-fired power plant.  The company has indicated its plan for any new generating capacity is to use natural gas feedstock for combustion boilers, or adopt wind or solar technologies.  These days utility-scale renewable energy sources have become more competitive with coal and natural gas.  For example, on-shore wind turbines range from about $1.3 million to $2.2 million per megawatt of nameplate capacity.  Even in the most expensive locations in California or New York, solar farms require approximately $1.2 million per megawatt capacity.  Wind and solar might be out of the range of possibility in the Arkansas area.  The region benefits from ample waterways, making hydroelectric a possibility.  However, large hydropower plants can require as little as $1.3 million per megawatt, but could cost as much as $7.7 million per megawatt capacity.
New technologies and operating practices may help reduce the carbon footprint of coal.  However, the cost of construction and operation could still be prohibitive if reduction of greenhouse gas emission remains a priority.  Advocates for the coal industry argue against the standards that require the systems installed at AEP’s Turk plant  -  systems that arguably helped escalate the cost to $1.8 million per megawatt.  Unfortunately, without those systems, cheap electricity for Arkansas residents would mean expensive environmental damage that must be paid by others. 
Arkansas is known as the Natural State.  There is nothing ‘natural’ about as much as 1,000 pounds of carbon dioxide pumping into the air from a coal-fired power plant.  To use coal for power production and keep Arkansas true to its nickname requires a financial commitment of the sort made by AEP when the Turk power plant was designed and constructed. 
Environmental standards have not been so bad for AEP.  The company reported $16.4 billion in total revenue in the year 2016, providing $610.9  million in net income or $1.24 per share.  This compares to $14.9 billion in the year 2012, when the first Turk unit was commissioned, reflecting top-line growth driven by strength in demand for electric power.  Net income in 2012 was $1.3 billion or $2.60 per share.   
When only comparing the book-end years in the five year period, there appears to have been a dramatic decline in profits.  Some might erroneously conclude this is the result of burdensome environmental regulation.  In fact, AEP’s operating margin had increased to 20.3% in 2015, from 18.3% in 2012.  Profits in the year 2016 were impacted negatively by a $2.3 billion asset impairment charge on merchant generation assets.   Cash flows from operations were $4.5 billion, just a bit above the five-year average of $4.4 billion.     
Investors have apparently seen past the hyperbole on environmental regulation as well as the recent dip in reported earnings.  AEP’s stock price has soared in the five years since the Turk plant came online from prices in the low 40s at the beginning of 2013 to the high 60s in the most recent weeks.  It seems investors are prepared to reward AEP for trying to keep Arkansas in its ‘natural state’. 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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