Looking for profits from the end of the energy log-jam

12/02/2009 10:39 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

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 http://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.

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