Why You Might Want to Buy America's Dirtiest Coal

I know I've written a lot about coal this week. There's simply been a lot of "can't miss" items emerging. (Which in itself might an indicator--often when I find my attention drawn to a sector repeatedly in a short time, it's because something important is unfolding there.)

This item too, I believe, is a critical trend in motion for the coal industry: the rise of dirty coal.

Platts this week reported some shocking data on this front, in regards to U.S. coal buying.

Most significantly with respect to major U.S. utility and heavyweight coal buyer The Tennessee Valley Authority. A firm that has made some surprising changes of late in its coal-purchasing patterns.

The company's power plants are located primarily in the southeastern U.S. Therefore, they've traditionally relied on feed of Central Appalachian (CAPP) coal for electricity generation, from nearby Kentucky and Tennessee.

But the numbers show that Tennessee Valley Authority has lately ceased purchases of CAPP coal almost completely. In fact, a company spokesman said that by 2016 the firm expects to source only 1% of the 45 to 50 million short tons it uses annually from Appalachia.

The reason is: CAPP coal isn't dirty enough.

CAPP is in fact one of the cleaner coals produced in the U.S. Because of that, it's desired by environment-conscious power producers--who pay a significant premium for CAPP as compared to dirtier coals. Today, CAPP coal sells for $65 per ton, while dirtier coals like Illinois or Powder River go for $46 and $10 per ton, respectively.

But increasingly exacting environmental standards are eroding CAPP's appeal. Tightening standards recently prompted Tennessee Valley Authority to spend $5.4 billion on new emissions controls at its plants. With this new technology in place, the generators can burn even the dirtiest coals without infracting amounts of air pollution.

Thus eliminating the incentive to pay a premium for clean coal. The company has stated that it plans to increasingly source coal from cheap basins like the Illinois, Unita and Powder River--providing significant cost savings for its now environmentally-insulated operations.

This speaks to a sea change in the American coal business. With environmental pressure increasing, more coal burners will go high-tech like Tennessee Valley has. And in such an environment, cheap and dirty coal may in fact become one of the most saleable products around.

That's a major turn-around. And likely an investable opportunity, through producers focused in formerly-parriah dirty coal basins.

Here's to cleaning up the dirt,

By. Dave Forest