The news yesterday from Progress Energy (PGN) that it would shut 11 of its coal-fired plants by 2017 and replace them with natural gas and nuclear power plants shows how the lack of climate-change legislation from Congress is creating a huge backlog of energy construction projects.
Because I expect that Washington log-jam to break sometime in 2010, I think this is a good time to begin scouting around for companies that would benefit from a post-log-jam burst of construction. I’ll give you a few tentative suggestions at the end of this post.
Progress Energy CEO Bill Johnson said his utility would move ahead on its plans to replace aging coal-fired plants with natural gas and nuclear power plants even though it might make it harder for his company to comply with and profit from any future legislation aimed at reducing carbon emissions.
Any reduction in the amount of carbon that the company emits now—from shifting from coal, for example, to natural gas—could create a new baseline for the company. To meet the targets in any legislation, the company would have to reduce emissions even further from that new baseline. That new baseline could also reduce profits from any cap and trade system because Progress might not get credit for any reductions it makes before the legislation went into effect. (Cap and trade would give a company credits for reducing its carbon emissions. The company could sell those credits to companies who need to reduce their emissions.)
Johnson voiced a hope that Congress wouldn’t penalize his company in this fashion for reducing carbon emissions now, but who knows whether or not Congress would grandfather in such work.
Progress seems to feel that even with this uncertainty it’s worth while moving ahead with its plans for three reasons.
First, adding state-of-the-art pollution controls to these older coal-fired plants is likely to be terribly expensive. The company has spent $2 billion to add that technology to 2,500 megawatts of coal-fired capacity. The coal-plants that the company plans to close account for about 1,500 megawatts of capacity that would require pollution upgrades.
Second, the long lead times for building nuclear power plants means the utility needs to get started now if it’s to see results any time soon. The company has plans to build four nuclear plants but none are projected to begin generating electricity before 2017.
Third, natural gas is cheap. And looks to stay cheap. So moving to natural gas is a way to keep costs low.
But I don’t expect many utilities to follow Progress and press ahead with construction before Congress passes something. (Or before Congress clearly indicates it’s not going to pass anything. It’s the uncertainty rather than the specific details of the outcome that has created this construction bottleneck.)
For example, Duke Energy (DUK), a neighbor of Progress Energy, has announced that it is closing some coal plants but it is building a new one to replace them. That would keep Duke’s baseline for cap and trade credits relatively unchanged.
I’ve just started my research into the companies positioned to benefit from the breaking of this log-jam. Recent Jubak’s Picks Ormat Technologies (ORA) is a result of the early stages of that research. (For my buy of Ormat see my November 17 post https://jubakpicks.com/2009/11/17/buy-ormat-technologies-ora-2/) But I’ve still got a way to go. Other stocks I’m looking at include Shaw Group (SHAW), Flowserve (FLS), Fluor (FLR), and Jacobs Engineering (JEC).
Always glad to add your suggestions to the list.
I like FLR and SHAW right now. Especially FLR. You can buy it 15-20% below fair value and there is a lot of room for upside surprises. To skieth, this is a an investment site not a place to for intolerant political polemics. The contempt of opposing viewpoints demonstrated by the climate scientists is reflected in the tone of your post and is a large part of the reason the opposition is digging in its heels. Rational people don’t trust fanatics.
EdMcGon, I think the only people convinced that those leaked emails show some conspiracy to silence climate change critics or to distort the science are people who thought climate change was untrue ahead of time. Gee, if we had to throw out a theory everytime I called an opponent dunderhead or worse, we’d be looking at a word without gravity or a heliocentric solar system. The biggest obstacle in getting something passed in the U.S. isn’t the science, but how to pay for it. The closer this vote in Congress comes to November the more likely we’ll wind up with some worthless system of cap and trade like they have in the EU because that system gives the politicians the abililty to pay off any business opposition.
cabledog, I do look at governance. I don’t particularly like owning a unit of a parent corp, but then I don’t like taking a minority position in much of anything–too easy for the majority owners to vote their own interest–but sometimes I hold my nose and do it. I don’t have a hard and fast rule. Partly it depends on how long I think I’m going to hold the stock for. The shorter the likely holding period the less weight I give to governance.
I’ve owned PGN for awhile and it’s not done much, but it has paid a steady dividend. The current yield is 6.26%.
“Climategate” (not sure when we started naming -gates according to the victim) shows only two things:
– climate scientists are contemptuous of fools
– this contempt is justified
The deniers would fight science with science if they had any actual science on their side. The fact that they have to resort to cherry-picking 12 or 14 emails (out of THOUSANDS) that were stolen from a private server in order to “prove” their case only serves to highlight how weak their case is. All of the “gotcha” emails I have seen so far have simply been interpreted wrong by the non-scientists who are presenting them. None of them have demonstrated that global climate change is just a huge conspiracy, only that the non-scientists who are crowing over these emails have a transparent agenda and don’t care about facts.
Jim, I have to respectfully disagree with you here.
First, cap and trade is dead, thanks to “Climategate”. If Congress passed cap and trade now, they’d look as out of touch as they truly are. By the time they are finished with health care (their top priority at the moment), cap and trade will be DOA. Progress is taking a calculated risk, but the odds are in their favor on this.
Second, look at what they are planning to do: add natural gas (cheap and clean, so less conflict with current environmental regulations) and nuclear (tops in energy production). Smart planning, regardless of “green”.
I give Progress credit for reading the tea leaves correctly.
In your recommendations, do you give any weight to corporate governance? Your selection of Ormat suggests that you don’t, nor do I remember your discussing governance in The Jubak Picks.
Google announced today they will become directly involved into energy techs. “We’ll make a step soon into energy projects,” Dan Reicher, director of climate change and energy initiatives at Google.
“Energy innovation to me means a real pipeline that goes from basic research to applied research to demonstration projects to the scale up and from there to full commercial deployment,” Reicher said. “It’s a long pipeline and to be honest we don’t do a very good job of moving technologies through this pipeline.”
Reicher said the Googlers have even coined a clever phrase to describe their vision of energy policy: “from lightbulb to lightbulb.” They want to help move new technologies from the idea (the first lightbulb) to the product (the second lightbulb).
source:
http://www.wired.com/wiredscience/2009/12/google-greentech-power-plants/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+wiredscience+(Blog+-+Wired+Science)
This baseline problem is one of the reasons a carbon tax would be preferable to the cap and trade. A carbon tax would reward the proactive companies. We had this same problem with water rights. Several farmers were proactive and improved their irrigation efficiency to reduce their use of the groundwater resource simply be cause it was the responsible thing to do. When regulations were finally enacted, they had a lower baseline than their neighbors and the water use reductions nearly put them out of business.