December 24, 2009

THE UR LEFT COAL IN OUR STOCKING:

Copenhagen's Delay Fires Coal (LIAM DENNING, 12/23/09, WSJ)

Rob LaCount, a senior director at IHS Cambridge Energy Research Associates, reckons that as the window of opportunity for passing comprehensive legislation closes, a more piece-meal approach becomes likely.

The big losers from this continued uncertainty are companies with large, unregulated nuclear power portfolios, such as Exelon and Entergy. Nuclear plants, with their zero carbon emissions, represent an option on carbon. If carbon were to become embedded in the electricity price, as coal and natural gas-fired generators factored it into their costs, the benefit would flow to the nuclear generators' bottom lines. The more that day is deferred, the less tangible those extra cash-flows are.

Conversely, unregulated power producers burning coal benefit from this stay of execution. Not all benefit equally, however, with much depending on the regional market in which they operate. In the absence of a cost of carbon, coal-fired generators selling into wholesale markets where natural gas-fired plants set the marginal price of electricity tend to earn good profit margins per megawatt-hour of electricity produced.

Carbon pricing would savage such margins—that's the idea, after all. In its absence, it might be time to reappraise Allegheny Energy, the worst-performing member of the S&P Utilities index this year. As Morgan Stanley points out, its unregulated generation portfolio is mainly coal-fired, operating where gas-fired competitors set electricity prices. At 11 times 2009 earnings versus a sector average of 13.4 times, Allegheny appears priced for change that Copenhagen did not deliver.


What else should we expect from an administration where the VP is a coalminer's son?

Posted by Orrin Judd at December 24, 2009 8:15 AM
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