A Texas coal rush (cont.)

By Marc Gunther, Fortune senior writer

A cash cow

Maybe so, but until the U.S. or Texas regulates greenhouse gases, TXU's big bet on coal looks like a sure thing. John Wilder, TXU's chief executive, who has won respect on Wall Street, has said that the new plants could generate an additional $700 million in annual profits; in the past four quarters, the company earned $2.4 billion.

Burning coal is an especially good business in Texas, because the retail price of electricity is tied to the cost of more expensive natural gas, which supplies 70 percent of the state's power. Of course, it's also a good business because the costs of carbon emissions, air pollution and underground mining accidents are borne by the public.

But even if Congress decides to put caps on carbon emissions and somehow persuades President Bush to go along, analysts say that TXU's $11 billion investment should deliver a healthy return.

Hugh Wynne, an analyst with Bernstein Research, looked at a scenario under which gas prices would fall to $6 per million British thermal units (they're now about $7.50 per million BTUs) and CO2 would be taxed or regulated at a cost of $10 per ton, and concluded that TXU would still generate a return in excess of its cost of capital.

"The economics of TXU's proposed expansion plan appear to be remarkably robust," Wynne says. Then again, if plants cost more to build or take longer than anticipated to get online, or if coal is taxed at a higher level or the costs of solar or wind power come down dramatically in the next decade or so, TXU could have a problem. Coal plants have a lifespan of about 50 years.

A dirty business

As the plants go through regulatory review this winter, TXU and its critics can't agree on much. The company says it will deploy state-of-the-art technology to trap the conventional pollutants caused by burning coal - sulfur dioxide, which causes acid rain, and nitrogen oxides, which combine with sunlight and ozone to make smog.

That will make the air cleaner, the company says, because its overall emissions of SOX and NOX, as they're known, as well as mercury, will drop by 20 percent after the new plants come online and older ones are retired. Replacing plants will also offset some of the greenhouse-gas emissions from the new generators.

The greens are not impressed, saying TXU is only doing what it's obligated to do under the Clean Air Act at a bit faster pace. Besides, says Jim Marston of Environmental Defense, air quality will get worse in some places, even if it improves in others. "You don't breathe average air," he says. "You breathe the air you breathe."

Another dispute revolves around mercury emissions. Kim Morgan, a company spokesman, took me on a tour of a surface mine ("We don't call it a strip mine") next to the 1.6-megawatt Big Brown coal-burning plant in Fairfield, Texas; after 35 years of mining, some land has been reclaimed as a nature preserve, and a popular bass-fishing tourney is held at a nearby lake. Mercury? Not a problem, she assures me - TXU's new plants will comply with the EPA's mercury rules.

But at a regulatory hearing in Waco - ground zero for the battle, because nine coal plants would be built within 50 miles of the city - dozens of farmers, ranchers and local businesspeople, including the director of the Waco Chamber of Commerce, posed pointed questions about the potential for smog and mercury pollution.

Sloan Kuehl, a local banker, raises cattle and manages ponds stocked with bass and catfish on a 90-acre tract near one plant. "This is a beautiful area," he said. "My concern is about our quality of life." He and others say the EPA's mercury standards are inadequate.

Outside the hearing room, meanwhile, a protester stood before a TV camera waving a sign you don't often see at a political rally. It said, "IGCC is the best solution."

This is yet another bone of contention. IGCC stands for integrated gasification combined cycle, a technology that turns coal into synthetic gas and makes it possible to sequester carbon dioxide underground. TXU's critics say that if the company must make electricity from coal, it should do so using IGCC. At least try the technology on one or two plants, they ask.

The trouble is that only two of the 1,300 coal plants now operating in the U.S. deploy IGCC technology. Both are small, required government subsidies, and don't work as well as they should, some people say.

General Electric, which has touted "clean coal" and IGCC under its Ecomagination initiative, is nevertheless selling conventional generators to TXU for its proposed coal plants. "We'd love nothing more than to crack that nut," McCall says about IGCC. "But it's not a technology that has ever been built to scale." GE's chief executive, Jeff Immelt, says that IGCC suffers from a chicken-or-egg problem, meaning that until more plants are built, economies of scale won't come into play.

No new technology, by contrast, is needed to drive what looks to be the cheapest and cleanest answer to Texas's electricity needs: efficiency. A study commissioned by the NRDC and Ceres, a Boston-based coalition of institutional investors and environmental groups, has called on Texas to require more efficient appliances, heating and cooling systems and office equipment.

The consulting firm McKinsey recently said that efficiency measures, using today's technology, could reduce the growth rate of worldwide energy consumption by more than 50 percent over the next 15 years.

Here California's experience is instructive. "Aggressive standards and incentive programs are a big reason that per capita energy usage in California has remained flat over the past 30 years, while the rest of the nation has increased its usage by 50 percent." That argument comes not from the greens but from a utility executive, Peter Darbee, the chairman and CEO of PG&E. He supports stricter national efficiency rules and mandatory federal caps on greenhouse gases, and he's enthusiastic about solar thermal technology and plug-in hybrid cars.

All that is more evidence, as we said, that corporate America is getting serious about global warming. As for the rest of America, well, that's a different story. There's no sign that consumers are willing to give up big houses and cars. Despite Wal-Mart's best efforts, millions of us still buy energy-wasting incandescent light bulbs rather than money-saving compact fluorescents.

Greg Gordon, managing director of electric utility research for Citigroup, says, "There continues to be massive demand for electricity, in part because we choose as a political and economic entity not to aggressively pursue conservation. You have demand growth. You have to ask, How do we meet that demand?" TXU says the answer is coal, and unless Texas gets serious about global warming in a hurry, it looks as if the company will have the last word.  Top of page

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