The Future of Coal Today

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Coal, one of this country's most abundant fuels, is increasingly being targeted as a dirty fuel. That doesn't have to be the case because the technology to “clean” coal exists today. General Electric (NYSE: GE) and Siemens (NYSE: SI) both build it, and Southern Company (NYSE: SO) and Duke (NYSE: DUK) are set to use it.

A Dirty Fuel

Coal fuels around 40% of this country's electric generation. The problem is that burning coal emits numerous pollutants. As we've increasingly recognized the impact of our actions on the environment, coal's image has, justifiably, suffered. However, some of the plants now in use are more than 50 years old. We've made a few technological advances over the last half century or so.

Cleaning up its Act

In fact, the technology to clean coal is available today. It isn't cheap, but a few companies are building integrated gasification combined cycle coal plants. This system turns coal into a gas and then removes pollutants like sulfur and mercury, among others. The clean gas is then used to fuel a turbine to produce electricity. Heat from the process is also used to drive a steam turbine to make even more electricity. Carbon dioxide can be captured after the burning process.

This is the type of plant Duke has just turned on. It claims it will produce ten times the electricity as the coal plant it replaces and 70% fewer emissions. That shows how clean and efficient coal can be if companies use technology to limit emissions.

This plant should allow Duke to keep low-cost coal as a viable fuel option. That's particularly notable as natural gas prices have increased off of their historic lows. In fact, the price rise so far this year has led to a decrease in the the use of gas and an increase in coal. If switching to coal weren't an option, consumers would ultimately pay the price through higher electric bills.

Duke is one of the largest utilities in the United States, serving around 7.2 million customers in six states. The company just went through a somewhat troubled merger with Progress Energy, costing nearly $14 billion, which led to the retirement of Duke's CEO.

The shares yield around 4.6%, the dividend has been increased annually since 2007, and the top and bottom lines look set for slow but steady growth. The new coal plant should help keep fuel costs low, which will help long-term performance. Income investors should take a look.

Costly Upgrades

Duke's new coal plant costs more than originally planned and all of the costs couldn't be passed on to customers. Shareholders indirectly pay any costs that don't get paid by customers in the form of slower earnings and dividend growth. That's a big issue to watch, since clean coal technology is expensive.

Southern Company is building a similar coal power plant that has also seen cost overruns. It isn't complete, so there's no telling how much it will cost or how much of that cost Southern will be allowed to pass on to customers.

Still, keeping its energy options open will be a long-term benefit for Southern and will likely make the expense well worth the effort. It is also one of two U.S. utilities currently building new nuclear power plants. Clearly, the company is keeping up with technological change.

Southern serves around 4.4 million customers across four states. The shares recently yielded around 4.6%, backed by over a decade of annual dividend increases. It is a good option for conservative income investors.

The Makers

As more coal gasification plants get built, the easier it will be to figure out their true costs and avoid overruns. Higher natural gas prices will only increase the economic viability of such projects. That will benefit General Electric and Siemens, both of which offer coal gasification technology. Although not the main business at either company, power is a key business for each.

GE is probably the better option for investors. Since taking a government bailout and cutting its dividend during the 2007 to 2009 recession, it has refocused around its industrial core. That's been a slow process, but earnings and dividends have headed higher over the last three years. GE shares recently yielded around 3.2% and remain well off their pre-recession highs. There's plenty of upside potential.

Siemens, meanwhile, is a roughly similar industrial giant based out of Europe. While the company didn't face the same financial difficulties as GE during the recession, its exposure to economically troubled Europe remains a drag. Additionally, the company's profit margins aren't as robust as GE's.

Siemens is restructuring to bring costs down. Over the next few years that should help improve margins and support earnings growth. The shares yield around 2.8%, but don't have as much long-term appeal as GE.

Fixing Coal

The technology to clean coal is here today. It isn't cheap, but keeping coal as a fuel option is vital to keeping electric costs contained. Southern and Duke are ahead of the curve on building the coal plants of the future and should ultimately benefit from their willingness to take risks. GE and Siemens, meanwhile, will benefit as new coal plants are built using this technology both domestically and abroad, where the use of coal isn't frowned upon.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Southern Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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