USA: Clean fuels energy, ¿Greener Days Ahead?

by Brian Wingfield

At first glance, the pro-environmental rulings handed down by the Supreme Court this week seem to bode unfavorably for utility companies as owners of power plants that produce harmful greenhouse gases such as carbon dioxide.

But in fact, the twin decisions could actually give a boost to energy companies that are already betting their future on investment in alternative fuel sources such as wind, nuclear and coal technologies.

The justices' rulings this week have prompted lawmakers to call for a national climate change policy, which would obviously have a long-term investment impact on industries that produce global warming emissions.

In the most publicized case, a 5-4 landmark decision, the court ruled that greenhouse gases are pollutants and are thus subject to regulation by the Environmental Protection Agency. In a second, unanimous ruling involving Duke Energy (nyse: DKE), the justices said that before making major modifications to coal-fired power plants, plant owners must have a permit, which would require that the facility be outfitted with anti-pollution controls.

Make no mistake, coal is the most abundant, cheapest and dirtiest fuel source in the United States, and because of its prevalence, it will remain the largest component of the nation's fuel mix. However, as the industry looks 10 to 15 years down the road, when federal caps on carbon emissions are likely to be in place, companies are already investing increasingly in greener technologies.

As part of leveraged buyout by private equity groups, Dallas-based TXU (nyse: TXU) recently scrapped its plans to build 11 coal-fired plants, opting instead for three coal plants that include emissions-reducing technologies. The company has also announced plans to build two "clean coal" power plants last week just as it announced the completion of a wind farm that will provide power to 24,000 homes.

Similarly, Ohio-based American Electric Power (nyse: AEP) last month announced plans to place carbon capturing technologies on two existing coal plants by 2011. NRG Energy (nyse: NRG) has proposed "clean coal" plants in Delaware and New York, and it is considering adding nuclear generation to its Texas operations within the next decade.

Atlanta-based Southern Co. (nyse: SO) is expected to break ground later this year on a test facility that will capture carbon emissions and store them underground. And last year, the company signed an agreement with the Energy Department to build clean coal plant near Orlando, Fla.

In the West, Xcel Energy (nyse: XEL) last month issued requests for proposals to expand its wind facilities in Minnesota, and the company recently announced plans to build the largest solar plant in the United States in Colorado.

According to Randall Swisher, executive director of the American Wind Energy Association, which represents the interests of the wind power industry, the court's decisions and the investment in renewable fuels illustrates the "growing consensus" that something must be done to curb global warming.

"This is going to be a good space for any investor to be in," he says of the wind industry in particular.

The unknown, of course, are the costs associated with building generators of clean and unproven technologies. For the moment, facilities that gasify coal to make it cleaner are not widely in operation, and in spite of the many permits being sought by utilities to build nuclear plants (if they wish to do so), no one has come forth with a proposal to actually build one.

"The pressure is very intense to begin considering clean coal technologies as an alternative," says James Holtkamp, a partner and manager of the environmental compliance group at the law firm of Holland and Hart. But he cautions that it is still not clear whether the decisions will push utilities into pursuing clean fuel sources.

On Capitol Hill, Democrats are already using the momentum of the court's decisions to push for mandatory limits on carbon emissions, but anything they come up with in this Congress is likely to be diluted. Conservative Democrats who were just elected do not want to risk alienating their constituents by appearing too green, and it remains unclear whether any legislation would even be signed into law by a pro-industry, outgoing president.

The court's decision gives politicians and industry leaders a clearer picture of the legal landscape surrounding climate change. However, Democrats may have better luck keeping the dialogue going through 2008, hoping that voters will again hand them control of Congress and will put a liberal president in the White House.

In any case, utilities appear to be hedging their bets early. The question appears to be when--not if--lawmakers place limits on carbon emissions.