Coal plants get burned

NEW YORK (Fortune) -- These are troubling times for any company trying to build a coal-fired power plants - and more than 150 of them are being planned across America.

Opposition is mounting to coal plants because they contribute to global warming. The plants are getting harder to build because activist groups try to stop them, causing delays that raise operating costs. And investors are paying attention. Federal regulation of carbon emissions, which is being actively considered by Congress, could also make burning coal more expensive.

"Wall Street is every day becoming more aware of the risks of building new coal plants - both the carbon-cost risks and the reputation risks," says Dan Bakal, director of electric power programs for CERES, a coalition of environmental groups and institutional investors.

Coal-fired plants suffered a stunning setback when two private equity firms agreed to buy TXU (Charts) for $32 billion, and immediately dropped plans for eight of 11 planned coal plants. The buyers, Texas Pacific and Kohlberg, Kravis and Roberts, sought the approval of environmentalists before announcing the deal. Before then, TXU had staking its future on coal plants.

Another setback: The decision by the Edison Electric Institute, the utility industry's trade association, to drop its longtime opposition to the federal regulation of carbon emissions, if certain conditions are met.

Still another: A forthcoming study from MIT faculty members will raise tough questions about so-called clean coal technology, according to The New York Times. This technology injects carbon dioxide into deep geological formations, but the study found that this won't be as easy to do as proponents have argued. Some utilities have been hoping that carbon storage will overcome environmental objections to coal.

As if that weren't enough, James Hansen, one of the world's top climate scientists, went to Washington last week to call for a moratorium on building any new, conventional coal-fired plants. And a United Nations panel of 18 scientists who spent two years studying global warming also concluded that no more conventional coal plants should be built.

All of this, and particularly their victory over TXU, has emboldened the green activist groups that are fighting coal plants from coast to coast.

"I think the ground is shifting very rapidly under the feet of utility managers," says Stephen Smith, executive director of the Southern Alliance for Clean Energy. He noted that just this week Duke Energy (Charts) was forced by state regulators to pare back its plans to build 1600 new megawatts of coal-fired capacity near Charlotte, N.C., and to invest in energy conservation instead. The company got permission to build an 800MW plant and said it would reassess its plans.

"There's a strong buzz in the environmental community that we've got Big Coal on the ropes, and we're moving in for a knockout," says Mike Brune, executive director of the Rainforest Action Network, which campaigned against investment banks that were going to finance TXU's $11-billion coal-building plan.

Still, the circumstances surrounding TXU were unique. TXU planned to build more coal plants than any other company, and all 11 of them were to be in Texas, making it easier to galvanize opposition.

Unusual, too, is the fact that Texas Pacific, one of the buyers, was founded by David Bonderman, a supporter of environmental causes. Bonderman sits on the board of The Wilderness Society, the World Wildlife Fund and, most interestingly, the Grand Canyon Trust, which opposes new coal plants in Utah and New Mexico. Not many Wall Street tycoons support anti-coal advocacy.

Jim Owen, a spokesman for the Edison Electric Institution, concedes the obvious - that rising concerns over global warming make it harder to build conventional coal plants. But he says the industry is working aggressively to develop "clean coal" technology and overcome whatever obstacles arise, such as those raised by the MIT research.

Plants that burn coal now supply more than 50% of the nation's electricity. Coal is a low-cost and abundant fuel - burn less of it and the cost of electricity will rise. What's more, demand for electricity is growing nationally by about 1.5% a year.

"We'd argue strenuously that [the TXU deal] is not a death knell for coal," Owens says. "We have a 300-year proven supply of coal. We are going to have to find ways for us to keep that in the mix."

Here are some places where the next TXU-style battle over coal could unfold:

• Houston-based Dynegy (Charts) plans to acquire the LS Power group, which has nine coal plants with about 7,600 MW of generation in various stages of development in Texas, Georgia, Nevada, Iowa, Arkansas, Colorado, Virginia and New Jersey. Peter Altman of the National Environmental Trust says Dynegy's shareholders may not want to place such a big bet on coal.

• Florida Power & Light (FPL) wants to build two 980MW coal-burning units near the Everglades. "The state of Florida should not be building coal plants because of its vulnerability to global warming," says Smith of the Southern Alliance for Clean Energy. "That's going to be a knock-down, dragout fight."

• Peabody Energy (Charts), the nation's largest coal producer, has had plants in Kentucky and Illinois held up for years by political protests and lawsuits filed by the Sierra Club and its allies. "[Peabody has] not yet demonstrated that coal has a future in a world that is serious about global warming," says Bruce Nillis, who directs the Midwest clean energy campaign. Vic Svec, a Peabody spokesman, says both plants will be built. "We are close to finish line," he says. "With each passing day, the need for baseload energy continues to grow."

The next TXU-style battle might even be about TXU. The company still wants to build three coal plants, and environmental groups like the Rainforest Action Network say they will oppose them. Says Mike Brune: "We have a blanket no-coal platform."