With less than a year left for states to provide their carbon-reduction plans under the Environmental Protection Agency’s Clean Power Plan (CPP), it behooves energy investors to pay attention to what is likely to be a nuanced investing landscape.

True, the plan will lead to a continuing reduction in coal-fired generation to the benefit of natural gas, wind and solar. But not all coal generation is created equal. And how utilities fare under the plan will largely depend on whether they are regulated or not.

Additionally, there may be legal challenges that result in changes and delays to the plan, which was finalized in August and requires states to submit their plans by September and put them into practice by 2022.

But in a recent report, Morningstar director of utilities research Travis Miller said he expects the CPP will survive mostly intact but that opponents could win modifications and implementation delays.

“We expect environmental rhetoric to continue spewing from Washington, D.C., for the foreseeable future,”Miller said in the report. The CPP “will be the primary target for lawyers and politicians.”

When electric utilities with generation assets announce their CPP plans in coming months, Miller isn’t expecting big shifts in strategy.

“We do expect utilities to boost investment in renewable energy and gas-fired generation,”he said in the report. “More coal plant retirements could be on the way.”

Coal assets are already valued much less today than in the past because of low prices for competitor natural gas, and some coal assets may get distressed further under the CPP, Derek HasBrouck, energy expert with PA Consulting Group, told Entelligent.

It is likely the CPP will lead to job losses in merchant coal generation fleets as well as coal mining and related industries, he said.

It remains to be seen whether coal-industry opponents of the plan will be able to successfully argue in court that the CPP harms them by forcing them to make large capital expenditures before the plan even goes into effect, he said.

Unregulated merchant coal utilities could be stressed by having to make significant investments under the CPP and rely on the market to see returns, Charles Fishman, equity analyst with Morningstar who has been following CPP and climate change issues, told Entelligent.

However, effects will be asset specific, as some unregulated independent power plants with efficient coal assets could do well under the plan, he said.

The big winner under the CPP will be natural gas, HasBrouck said. But the CPP will also open up more space for solar, wind and especially storage or other firming technologies, he said.

While the coal states and coal companies, and some utilities, are not happy with the CPP, regulated utilities stand to benefit in some areas of the country where regulators have shown that utilities can get fair returns on investments, Fishman said. Regulated utilities in states where they might not get fair rates of return would be riskier, he said.

Regulated utilities like Duke Energy (NYSE:DUK), Southern Company (NYSE:SO), Dominion Resources (NYSE:D), Virginia Electric & Power (NYSE:VEL-E.CL) with assets in places such as North Carolina, Indiana, Georgia and Alabama stand to do well under the plan as they work with regulators and stand to see a fair rate of return, he said.

“If financing costs stay low and regulators are forced to support investment, the CPP could lift earnings growth for some utilities, similar to investments utilities made in non-carbon emissions controls,” Miller said in the note.


Matt Whittaker is a journalist specializing in natural resources coverage. His work has appeared in The Wall Street Journal, Barron’s and other international publications. He has reported from the Americas, Europe and Asia.