Wednesday, June 04, 2014

EPA proposals simply oversee trend

Written by  Douglas John Bowen, Managing Editor

Phase out coal? Anathema to you? I certainly sympathize with the concern expressed by the Railway Supply Institute (RSI) and the Association of American Railroads (AAR) in their measured initial responses to proposed Environmental Protection Agency (EPA) rules announced June 2, 2014.

But, quoting a 1960s verse: Change is now; things that seem to be solid are not. Change is already happening anyway on a national scale when it comes to coal, EPA rules or no. And as it occurs, North American freight railroads will have to adapt, if not today, then sometime soon.

I’m optimistic that railroads can adjust, and will. In fact, from what I can glean, some of the Class I players already are quietly on the move, and signaling same to Wall Street. Sure, the louder talk may be exporting to Europe, where coal markets have rebounded as renewable energy efforts waver. Others exhort exporting to China, where U.S. coal faces stiff competition from comparable, and closer-in, Australian coal sources and delivery lines. That’s the short-term option—and a good one, as I see it. It buys time. But it only delays, not thwarts, the inevitable.

And as for Wall Street, here’s a brief analysis from The Motley Fool dated Oct. 27, 2013 – that’s last year, I hasten to stress:

“It's no surprise that old and inefficient coal power plants are being shut down and are, generally speaking, being replaced by natural gas and renewable energy options. The coal industry is well aware of this long-term trend, but is probably less concerned than you might think.”

Skipping past an observation by The Sierra Club (a suspect environmental group, but as the cynic can assert, on this issue aren’t they all suspect?), the Fool continues:

“For example, coal-heavy American Electric Power [AEP], which gets about 60% of its electricity from coal, has plans to reduce [coal-generated electricity] to about 45% by the end of the decade.”

Given the times, we all will be treated to The Blame Game. Blame will go to the Obama Administration (Big Government), or the rise of the natural gas alternative (the Market) or, at a height of paradox, both of them at the same time.

But the blame game doesn’t matter. U.S. coal plants are being phased out, sometimes rapidly, often methodically, and not just “due to low natural gas prices.” Coal is also losing out to the renewables, and to better efficiencies and conservation (there’s a dirty word, right—conservatives?). It just doesn’t pay to retrofit many existing coal plants (there are exceptions, including one in western Pennsylvania where the price and payback were right). And it sure doesn’t pay for companies to build too many new plants, given current trends already in motion, EPA or no EPA.

Put all those moving pieces together, and you have a better answer than the tired tirade heaped on so-called “environmental socialism.” No, it’s also a capitalist market exerting its will on a fuel whose dominance is winding down. Coal use certainly isn’t headed for zero, any more than firewood (a renewable fuel in the eyes of the Department of Energy, but I see it, in some ways, as “very young coal”) has stopped in full.

Freight railroads certainly need not prepare for coal’s demise; demand of some sort will remain in place for many years to come. But they’d better prepare for a very different long-term future—just in case people like me, but far better versed, are delivering a message that’s accurate to any degree. Change is now.