Climate change. It’s a touchy subject, with experts
constantly debating whether and how humans are impacting the environment via
carbon emissions, energy consumption and more.
But clearly, the Obama administration believes more needs to
be done to fight global warming. That’s why the Environmental Protection Agency
(EPA) released landmark, wide-ranging regulations today aimed at the electric
power industry. The goal? Encourage much cleaner energy production in the U.S.
over the next several years.
Specifically, the new rules are designed to cut carbon
dioxide emissions from domestic power plants by 32% by 2030 (from 2005 levels).
That’s up from a previous 30% reduction target. The EPA estimates the industry
changes required to hit that target will cost $8.4 billion per year. But it
also believes they will result in total benefits to things like public health
of as much as $54 billion, making it all worth it.
How will we get there? Who wins and who loses? And what do
the new regulations mean for investors?
Well, the coal industry is a major loser here. Utilities
have already been shuttering coal plants and abandoning the dirtier fuel in
droves, and these new regulations will only accelerate the shift. Coal produced
just 369 million megawatt hours of power as of the first quarter of this year,
down from 496 million ten years ago.
Will solar power be a big winner under President Obama’s
energy plan?
As a matter of fact, the coal meltdown claimed its latest
victim just today when Alpha Natural Resources filed for Chapter 11 bankruptcy.
The Virginia-based company operates 60 coal mines in five U.S. states, and it
joins several other competitors who have already gone broke. It will likely
close or sell off some facilities as it struggles to restructure its $3 billion
in debt amid plunging demand and prices for coal used to both generate power
and make steel.
Who wins as a result? Companies involved in the natural gas,
wind, solar and even nuclear power industries. Nat gas is already generating
291 million megawatt hours of power now, almost double the 148 million a decade
ago. Wind produces 45.6 million, compared with 3.7 million, while solar is up
to 5 million from hardly anything in 2005.
One firm, Sanford C. Bernstein, estimates that nat gas
consumption by the power industry will jump by a further 7.1 billion cubic feet
per day, or 32%, over the next few years. Coal consumption will tank 23%.
That said, the benefits for the nat gas industry look a
little less generous than they could have been. Incentives for the renewable
power industry look more generous than originally expected. So that makes
renewable energy companies even bigger relative winners.
The regulations are also sure to face tough legal challenges
from the coal industry, certain states, and other interested parties. That
means a Supreme Court challenge could ultimately loom, just as it did with
Obamacare.
“Regulations are sure to face tough legal challenges.”
Bottom line: The power industry won’t change overnight. Rule
modifications may loom down the road. But the gradual shift in the U.S. toward
energy sources like nat gas, renewable, and nuclear, and away from coal, will
likely accelerate as a result of these new regulations.
That means you may want to continue avoiding beaten-down
investments like the Market Vectors Coal ETF (KOL), already off 33%
year-to-date. Instead, take a look at investments like the Guggenheim Solar ETF
(TAN) – up around 3.5% YTD – or consider bottom-fishing in the nat gas sector.
Things like the First Trust ISE-Revere Natural Gas Index
Fund (FCG) and First Trust North American Energy Infrastructure Fund (EMLP)
have already been hit hard (down 38% and 10% YTD, respectively) amid the
broader energy sector struggles. But some of these companies should be able to
benefit from increased gas consumption, transportation, and storage in coming
years.
Our Readers Speak
What’s ailing America’s workforce? Why can’t
salary-and-wage-earners get bigger raises, even this many years into the
purported economic recovery? That’s what you were discussing over the weekend.
Reader Nerdmedic talked about the impact of rising health
care costs, and how that is impacting total compensation: “In my experience,
while wages are flat, the costs to the employer are not, particularly when
healthcare benefits are provided. In the past five years, the increase in the
employer-paid portion of the healthcare premiums represented an 8% increase in
employee compensation even though take-home pay remained static or, in some
cases, dropped.
“When it dropped, it was generally due to an increased
pension contribution which I view as deferred compensation. Granted, this is
within a local government agency and may not reflect what is going on within
the larger private sector economy. But it does illustrate that the total
returns on employment are not as bad as suggested.”
Reader Mike said he’s seeing the same thing being captured
by the broader statistics — income stagnation. His view: “My wages have been
basically stuck in neutral. Lucky if I get 1% for an increase. And the main
reason: They can get the labor cheaper (in terms of hourly rate) overseas.
“A lot of our work is being moved overseas. And being we
have to monitor (and usually fix) all of the overseas work, our productivity in
the U.S. is going down (in terms of what we produce ourselves). So we look even
worse in the reports that management looks at. They think the overseas labor
pool is great and the U.S. folks are slacking off. Talking with folks from
other companies, it doesn’t sound a whole lot different anywhere else.”
Reader Bill W. added the following observations: “Based on
the last few years, I’ve seen and heard from many friends and family that
raises have been scarce. Recently, I worked for a company that gave us bonuses
that reflected our performance – salaries didn’t change for five years.
“It was difficult managing cash flow when expenses go up,
but your salary doesn’t. It’s also frustrating to see EPS going up 8% to 9% a
year, but our salaries only go up 1% to 3%. No money for salaries, but plenty
for acquisitions. Corporations aren’t engaged to employees like they are to
Wall Street.”
Finally, Reader Chuck B. weighed in on the impact of
globalization and trade on American salaries and wages. His take: “Years ago,
the politicians began screwing around with various laws, regulations and
policies that would supposedly ‘improve’ things for American companies and
workers. One thing all these changes did was to increase costs for American
manufacturers.
“The manufacturers weren’t stupid. They realized if they
could no longer compete with foreign companies due to the various restrictions,
they could subcontract the work to those foreign companies and import things at
a lower cost to resell at a higher profit for their companies.
“America, which was once the ‘maker’ for the world, became
the importer of the world. The American workers lost their jobs and had to find
work elsewhere, often selling those imported products that took away their
jobs, and at a lower wage.”
Thanks for sharing. Proponents of freer trade (and new trade
pacts like the TPP currently being debated) point to its positive impacts – new
markets for American products, increased economic opportunity overseas, and
more. But clearly you’re worried about the economic fallout of increased
globalization here at home.
Regardless of the causes of income stagnation, it’s clear
the effect will be economic malaise – unless and until we see take home pay
increase at a healthier rate. And so far, there’s little evidence of that
happening.
Other Developments of the Day
Greece’s stock market opened for trading today … and
promptly tanked by more than 20%. Trading had been suspended since June 26 as
part of the country’s financial meltdown. Here in the U.S., the Global X FTSE
Greece 20 ETF (GREK) remained open for trading throughout the halt – so it had
already declined. It’s down 27% year-to-date.
It’s wildfire season out west, and 21 major fires are
burning throughout California. The Rocky Fire was in the news today, after
expanding to more than 47,000 acres yesterday. Thousands of homes are
threatened by the fire located roughly 100 miles north of San Francisco.
Market Roundup Dow-91.66
to 17,598.20 S&P-5.80 to 2,094.04 NASDAQ-12.90 to 5,115.38 10-YR Yield-0.055 to 2.15% Gold-$9.40 to $1,085.70 Oil-$1.72 to $45.40
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