U.S. Energy Policy Should Be Based on Natural Gas

Utilities are increasingly installing scrubbers to help remove sulfur from their plant emissions. Advanced scrubbers can actually strip out more than 90 percent of sulfur emissions. Fully scrubbed utilities can, therefore, burn high-sulfur coals and still remain compliant with the Clean Air Act.

— Elliott Gue, The Energy Strategist

With the Libya and Japan crises crowding out all other news headlines, it’s important to remember that domestic political battles continue to occur here in the U.S. I’m not talking about the call for President Obama to be impeached, but rather the battle over the Clean Air Act. As I wrote this past January in Duke Energy-Progress Energy Merger, the Environmental Protection Agency (EPA) was required under an October 2009 court-approved legal settlement to issue final rules regulating mercury, soot, and other toxic emissions from coal-fired power plants by November 2011. Last week (March 16th), the EPA finally issued its proposed toxic emission rules. According to EPA chief Lisa Jackson, the new rules will prevent:

as many as 17,000 premature deaths and 11,000 heart attacks a year. The new proposed standards would also provide particular health benefits for children, preventing 120,000 cases of childhood asthma symptoms and about 11,000 fewer cases of acute bronchitis among children each year.

Roughly 56% of all coal-fired power plants already meet the new emission standards, leaving a minority (44%) of plants that will need to install scrubbers within four years or shut down. Prior to this national emission standard, coal-fired plants were treated differently by each state and it wasn’t fair to the environmentally-friendly power producers. Now, the playing field has been leveled. Fairness is a good thing.

Republicans Try to Sabotage the Clean Air Act

Unfortunately, some Republican members of Congress disagree and are trying to pass legislation that would strip the EPA of its authority to implement the Clean Air Act. They falsely claim that regulating coal emissions would “kill the coal industry.” House Bill 910 and Senate Bill 482 would prohibit the EPA from promulgating any rule that would regulate greenhouse gasses “to address climate change.” House Bill 910 was approved by the Committee on Energy and Commerce 34-19 (including three yes votes from Democrats) and has been sent to the full House for consideration, whereas the Senate Bill is still in the Committee on Environment and Public Works. It’s not clear to me whether either bill’s prohibition would apply to EPA regulations aimed at improving human health.

Does climate change just refer to global warming? If so, than even if the congressional bills pass, the new EPA rules would not be affected because the main goal is preventing human disease, not preventing global warming. But I would prefer that the bills not pass because there will always be at least one creepy lawyer who will intentionally misinterpret the legislation and argue it prohibits the EPA from implementing any emission restrictions, even those that protect children. Fortunately, California Democratic Senator Barbara Boxer is the chairman of the Senate Committee on Environment and Public Works and I’m pretty sure that an environmentalist such as she will never let Bill 482 see the light of the Senate chamber.

Democratic Meddling in the Free Market is Very Costly

Although the Obama Administration fully supports Lisa Jackson’s enforcement of the Clean Air Act, its clean energy agenda is not satisfied with simply regulating coal plant emissions. Obama has gone further and his 2012 budget for the Department of Energy includes billions of dollars in subsidies for expensive renewable forms of energy such as wind, solar, and nuclear. In support of his president, energy secretary Stephen Chu has even made the preposterous assertion that wind and solar power will be no more expensive than oil & natural gas power by the end of the decade. Elliott Gue, editor of The Energy Strategist investment service, attended a conference back in 2009 where secretary Chu made a similar statement and this is what Elliott told his subscribers at the time:

If we fail to recognize the important roles oil, natural gas and coal will play–for decades to come–US energy policy will be meaningless. Dr. Chu also seemed to gloss over the major obstacles facing wind and solar power, particularly as these variable energy sources become a bigger part of the US energy mix.

In particular, I was disappointed that there was no discussion of the potential for greater use of clean-burning US-produced natural gas.

In congressional testimony last week, Chu also stated that the Japan nuclear crisis would not alter the Obama Administration’s budget proposal for $36 billion in loan guarantees to encourage construction of new nuclear power plants. Why should facts get in the way of an administration’s ideology?

As usual, neither the Republicans nor the Democrats in Washington can act in a bipartisan fashion and instead must pursue their separate extremist agendas, one side trying to prohibit the EPA from enforcing the Clean Air Act and the other side trying to cram budget-busting subsidies down the throat of American taxpayers for inefficient and uneconomic power sources.

The Third Way is the Best Way: Natural Gas

Isn’t there a third way, an energy policy that is both clean and market-based?

The answer is yes and it was recently articulated by John Rowe, CEO of nuclear power utility Exelon (NYSE: EXC). In a March 8th speech before the American Enterprise Institute (AEI), a conservative Washington think tank, Rowe argued that both the Republicans in Congress and President Obama were wrong in their approach to energy policy. Specifically, the EPA should be allowed to do its job and enforce the Clean Air Act and President Obama should stop trying to grant subsidies to uneconomic power sources. The road to clean energy is staring us in the face and doesn’t need government intervention: natural gas.

According to Rowe, the only cost-effective clean energy sources that exist today are existing nuclear (not new plants) and natural gas:

U.S. energy policy has been driven by a mess of mandates and power subsidies for nuclear, cleaner coal, gas, wind, solar and other renewables – a constant urge to pick winners and losers.

Congress needs to slow down.

Energy efficiency and uprates at existing nuclear plants are economic at today’s prices. New gas plants and coal to gas switching are the next cheapest options at a cost of $69 per MWh and $82 per MWh respectively, and those sources of cleaner energy are only needed as demand returns or supply is tightened by EPA regulations.

New wind, new nuclear, solar and clean coal all cost over $100 per MWh when you take into account the capacity factors, supply back up and so forth. Federal subsidies shift a portion of the costs from electric ratepayers to taxpayers, but do not change the overall economics.

Rowe also talked about the importance of taking into account societal costs caused by pollution:

Congress needs to let EPA do its work on the transport and toxics rules. EPA is merely enforcing the law. A law that was updated in an overwhelmingly bipartisan way in 1990 – with 93% of the House voting for it and 89% of the Senate.

Now, of course, these rules will be market intrusions, but they internalize some increasingly nasty externalities, and do so consistent with current law as construed by many court decisions. Thus far, the costs of pollution have been borne by society – in health care costs and environmental damages – but that cost is not included in the electricity price for burning coal.

The National Research Council found that the mean cost of damages per kWh from sulfur dioxide, nitrogen dioxide and particulate matter alone was $32 per MWh. For the most polluting plants, this cost rises to $120 per MWh on top of the existing average generation price of electricity from coal of around $30 per MWh.

Total damages from these pollutants are $62 billion annually. Now we know that the cost of externalities is a dark art. But, we also know they are substantial. Reflecting these costs in the market will pick the most inexpensive technologies to clean up the stack.

You may not believe that the science of climate is settled, but you cannot argue that sulfur dioxide, particulates, mercury, arsenic, lead, hydrochloric acid and other acid gases, dioxins and the other toxins are not harmful to human health.

Amen, brother.

Invest in Natural Gas with the Help of the Energy Strategist

Elliott Gue, editor of the market-beating Energy Strategist investment service is a big bull on traditional energy companies, especially those leveraged to natural gas. In fact, he has told subscribers that natural gas is the “21st Century Fuel”:

Natural gas is an abundant and environmentally friendly fuel that’s already revolutionizing key global energy industries such as petrochemicals. And natural gas is a far more viable alternative to oil in the transportation sector than any of the widely hyped alternative energy technologies.

To find out the specific names of the stocks he likes best in the natural gas space, give the Energy Strategist a try today!

Disclosure: Jim Fink owns shares of Exelon.