Old King Coal Heads to Retirement Home

NEW YORK ( TheStreet) -- Disposing of a coal plant isn't as simple as taking out the trash.

It's a new era of eliminating coal power, with a new federal rule ensuring the demise of many coal plants across the United States.

Opponents of the coal and utility lobby got their biggest victory in recent history in December, when the Environmental Protection Agency implemented a new rule for power plant standards that will make many existing coal plants obsolete. It marked the end of a 22-year battle in Washington D.C.

Utilities have been preparing for this day, but haven't quite figured out how to deal with the death of a coal plant.

Most utilities have decided it would be too costly to upgrade aging coal plants to the new EPA standards, and will look to convert them to other fuel sources like natural gas, idle or even demolish the plants going into retirement.

The utilities will also look to sell the coal plants, possibly piece by piece, wherever there is value to be derived from a turbine or steel rebar. The industry is still working out other sale methods as well, and that's where the story could get interesting.

The prospect of coal plant sales raises the issue of exporting pollution to other countries, while cutting down on it domestically. Global warming knows no geographic boundaries: The benefits to human health from the coal plant retirement in the U.S. would remain, though the global warming dimensions of the victory over coal would be diminished should the idled coal plants be revived on the horizon of other polluting skies.

Is it possible to export pollution by moving a coal plant, lock, stock and barrel to another country? It would seem unlikely, according to utility industry experts and executives at the utilities now charged with disposing of the legacy coal plants. However, corporate auction officials engaged in the still-evolving era of coal plant sales see some potential in an overseas market for the U.S. coal castoffs.

One trend is clear, though: Something has to be done with all of the coal plants that are no longer viable as U.S. energy assets, and demolition won't always be the option.

In fact, the energy sector is a booming one for the corporate auction market, whether it's the bankruptcy of alternative energy companies like Solyndra, or at the other end of the energy spectrum, the past era's coal fired power plants.

"I've been doing this forever and there's an old Wall Street saying, "Sell peanuts when the circus is in town. Right now the energy sector is the circus, and it's the entire energy sector, from the oldest 50- and 70-year old coal fired power plants all the way up. I've never seen a sector where the entire thing is in turmoil from oldest tech to the newest tech," said Ross Dove, managing partner at Heritage Global Partners, one of the few companies in the corporate auction market niche.

In the coal market specifically, the older plants would cost so much to bring up to new emissions standards that "lots don't pencil anymore," Dove said.

Several hundred coal plants will close in next five years, according to industry estimates consulted by Dove, who says as many as half could be sold piecemeal for salvage value in the electrical components and scrap metal. Several Wall Street forecasts focus on the amount of energy generation to be retired: 40 gigawatts to 50 gigawatts.

Turbines, though, could live to pollute another day, given new life, possibly in coal power plants overseas. It will depend on how modern the turbines are and how long their useful life is at the time of the U.S. retirement. A turbine can operate for 50 years and if it is only 20 years old, that might be an attractive asset for an overseas entity building a coal plant.

Heritage Global's Dove highlighted Latin America as a market where likely buyers could be located. He added that the existing utilities, such as Duke Energy ( DUK) and Exelon ( EXC), may keep retired coal assets, or even buy assets from peer utilities, to have "spare parts" for their coal plants that will continue to operate.

Chris Van Atten, a consultant with M.J. Bradley & Associates, which has worked with the utility industry, said there have been cases in the past where U.S. environmental law benefits less-stringent polluting countries: Buses and cars that don't meet U.S. standards have found a second life in markets like Mexico. Yet as far as the utility industry goes, there are no examples of this type of pollution export market.

For environmental advocates, that's good news. Van Atten says that a straight line can't be drawn from a retired coal plant in the U.S. to a cheap way for an overseas buyer to build a polluting coal stack anyway.

"An overseas plant would be constructed regardless, and this would just provide another avenue for acquiring parts cheaply," he says.

The ever-vigilant environmental movement, still basking in its victory, is reluctant to even consider this possibility. "Most of these coal plants have been around for 40 to 50 years and are being shut down because like ancient cars the value is little more than scrap. Many old boilers and turbines are like a car that's 15 years old: Is it good for much other than scrap?" asked Bruce Nilles, director of the Sierra Club's Beyond Coal campaign.

The utility industry, though, like the corporate auctioneers, aren't being as categorical in their relegation of the retired coal plants to the literal scrap heap.

"These aren't portable overall, but that doesn't mean components can't be taken apart like steam turbines," said Seth Schwartz of utility consultant Energy Ventures Analysis.

Pat Hemlepp, director of media relations at American Electric Power ( AEP), said the company's head of power generation has been contacted by one company interesting in looking at the plants that will be closed, but it's still early in the process. "There's just been one phone conversation," the AEP spokesman said.

"We obviously would be interested in this sort of option because anything we can do to offset costs incurred while closing plants will benefit our customers (we're a regulated utility in just about all of our states) and also our shareholders. But there's nothing going on right now," Hemlepp added.

He said that if AEP ever were to sign a contract to sell a plant it would set specific safety and environmental parameters for the company buying the plant, and it would be that company's responsibility to disassemble and ship the parts they wanted.

Hemlepp did say that in the only experience of idling a coal plant that AEP had a decade or more ago, one of the company's plants was purchased, disassembled and moved to South Florida, but not for power generation. It was rebuilt as a stone-crushing operation.

Dan Genest, Dominion Resources ( D) spokesman, said it plans to close a number of coal plants and if the utility got an offer from someone who wanted to buy it, Dominion would listen.

"We would consider any serious offer to purchase by any qualified buyer, however, we are not at liberty to discussion potential offers or buyers, and these are all a few years off," Genest said. Dominion plans to convert some existing coal plants to natural gas. Engineering, age and location will all factor in decisions to close coal plants.

A Duke Energy spokesperson said the utility is still a few years away from making these decisions. "I've heard people talking about taking pieces and re-purposing for other units in the Duke Energy fleet, but nothing more elaborate planned than that. We're just at the front edge of this retirement trend," the spokesman said.

Sierra Club's Nilles is willing to go out on a limb and tell the utilities where he thinks the front edge of the coal plant retirement trend will end: "Scrap at best is what I'm seeing."

Another way to look at the likely value to be derived from the end of old king coal's era is to ask Wall Street analysts who cover the utility industry what economic value they think will be derived from the coming retirements for the benefit of utility shareholders.

Michael Worms, analyst at BMO Capital Markets, wrote in an email, "Interesting questions, though one that I haven't thought of, and as it appears, neither have a lot of others on Wall Street."

-- Written by Eric Rosenbaum from New York.


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