Sell Coal Stocks — King Coal Gets Dealt Its Final Blow

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It finally looks like old King Coal will be losing its crown as one of America's major producers of electric power. For investors, that means the time to bow out of coal producers could be at hand.

The fossil fuel’s had a hard time going the last few years as natural gas has eaten its lunch in the cost department. Add in new hard-hitting regulations and it's easy to see why shares of coal producers have tanked, mines have been closed and a few producers have even filed for bankruptcy.

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Backing President Obama's promise to tackle climate change, the Environmental Protection Agency (EPA) recently announced strict new limits on newly constructed power plants — a plan designed to cut greenhouse-gas emissions. The new EPA rules build on the already proposed regulations that have caused the coal industry to effectively wither and could stop new coal-fired plants from being built all together.

The core of these new regulations will put a cap on just how much carbon a power plant can throw off.

For a coal-fired plant smaller than 850 megawatts, the facility will be limited to just 1,100 pounds per megawatt hour. That’s a tall order considering the average advanced plant in this size — fit with scrubbers and other carbon reducing equipment — puts out about 1,600 pounds per megawatt. Older coal fired plants emit around 1,700 to 1,900 pounds per megawatt.

In order to reduce the amount toxic output, utilities are going to have to use a process called carbon capture and storage (CCS) — a process that is very expensive hasn’t yet been used on a commercial scale. American Electric Power (AEP) recently shut down tests on a CCS projects due to cost overruns, while Southern's (SO) first large-scale CCS plant under construction is facing local opposition and nearly $1 billion in cost overruns.

The huge drop in allowed output, along with the need to use an unproven technology in new plants, isn’t sitting too well with various power producers and coal producers. Lawsuits and fighting on Capitol Hill are quickly becoming the norm for sector. Several industry lobbyist groups have already proposed ways to fight to the new regulations.

However, all of these efforts still won’t save coal.

Despite being a huge hindrance to the coal sector, the new regulations may not really matter. That's because natural gas continues to make building a new coal plant uneconomical. Even without adding in CCS facilities to a coal-fired plant, the cost is significantly higher than a comparable natural gas plant.

Already fracking and abundant natural gas has changed the economics of producing power for utilities. Experts now predict that natural gas will need to rise to nearly $10 million British thermal units — roughly three times the current price — before coal really begins to make sense for power producers. Interestingly enough, new natural gas-fired plants already met the proposed EPA rules.

According to the Energy Information Administration (EIA), none of the new power plants set to open or expand this year are using coal. Believe or not, there are actually more proposed nuclear facilities on the docket than coal plants. Overall, the EIA expects that U.S. coal consumption to remain essentially flat until 2030, before dropping off a cliff.

That certainly hurts the chances of coal stocks surviving long-term.

Already, the broad Market Vectors Coal ETF (KOL) is down about 21% year-to-date, while individual companies have fared much worst. Peabody Energy Corp. (BTU) — which is the largest U.S. producer — has fallen from more than $70 a share back in April 2011 to less than $19 a share today. Meanwhile, chief rival Arch Coal (ACI) has seen its stock price fall from $35 to less than $5 a share in the same time frame.

While it may be tempting to snag up bargains in the industry, the continued assault against coal and the continued abundance of natural gas make coal stocks clear stocks to sell or avoid, depending on your current position.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.