Promises from national leaders in such wide-ranging speeches are tailor-made to be broken, or at least badly bent. In this one, President Obama focused mainly on fixing the beleaguered US economy. There were, however, two very clear points concerning coal, and industry has already taken notice. To quote:

To truly transform our economy, to protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. That’s what we need. And to support — to support that innovation, we will invest $15 billion a year to develop technologies like wind power and solar power, advanced biofuels, clean coal, and more efficient cars and trucks built right here in America…

Point one is a renewed call for legislation to regulate carbon emissions in the US, with a cap-and-trade system similar to that set up under the 1990 Clean Air the most likely method. Point two is a call to spend heavily to develop clean coal technology. In fact, the call for clean coal development is right in the very same sentence with wind, solar, biofuels and more efficient vehicles.

These are points the president made throughout his campaign for the White House. That he’s making them again even more forcefully after winning a major legislative victory and with extremely high popularity ratings takes this campaign promise to another level, however. And coupled as it is with the No. 1 priority laid down in his speech–energy independence–it’s starting to look like we can expect action this year, possibly as soon as this spring.

In response to the president’s statement, the American Coalition for Clean Coal Electricity–a lobbying group for electricity producers using coal–stated it “strongly supports President Obama’s commitment to invest in new research and technology to help reduce greenhouse gas emissions from coal-based power plants while at the same time keeping electricity rates affordable for American ratepayers.”

That pretty much sums up the challenge here. There are still plenty of knee-jerk opponents to any use of coal, including the integrated gasification combined cycle (IGCC) plants. IGCC effectively strips half the carbon from coal by gasifying it first.

Moreover, plants such as Duke Energy’s (NYSE: DUK) Edwardsport facility in Indiana are being constructed to be retrofitted with carbon capture technology as it’s developed. That could potentially eliminate carbon dioxide (CO₂) the way current technology has eliminated emissions of the gases that once wreaked vast devastation as acid rain.

Coal-fired power plants still produce roughly half of America’s electricity, however. Mr. Obama’s clean coal push is a tacit acknowledgement that achieving energy independence without it is literally impossible, even with an unprecedented effort in renewable energy and energy efficiency. And it’s also a tacit acknowledgement that abandoning coal won’t fly in the US Senate. In other words, even if he wanted to do it–and there’s no evidence of that–the president couldn’t yank the nation off of coal.

The Opportunity

That spells a phenomenal opportunity over the next few years to develop commercially available and economic CO₂ removal technology for power plants. To be sure, there are plenty of potential uses for CO₂, once it’s removed. One big one, ironically, is injection into aging oil and natural gas wells, a process that can dramatically increase the yield and extend the life of such reserves. But it’s hardly the only one.

Researchers at Sandia National Laboratories in New Mexico, for example, are working on a method of using sunlight to convert spare CO₂ into gasoline methanol, the S2P project. Without getting too technical, that process basically reverses the combustion process by recovering the building blocks of hydrocarbons and synthesizes liquid fuels from them.

A solar reactor called a “Counter-Rotating Ring Receiver Reactor Recuperator (CR5) divides CO₂ into carbon monoxide (CO) and oxygen.  The process involves heating a series of cobalt rings to extreme temperatures, which are then exposed to the CO₂. The Sandia team theorizes that eventually coal plants could have “large numbers” of CR5’s, each producing roughly 2.5 gallons of fuel per 45 pounds of CO₂ reclaimed.

Other companies have focused on recycling the CO₂ produced in automobiles, some using palladium–the metal that, along with platinum, has historically been used for catalytic converters in automobiles. A handful of outfits are rapidly developing a technology based on combining solar energy with algae to create biofuels, animal feed, fertilizer as well as methane and oxygen.

Any or all of these processes could prove successful in capturing and utilizing CO₂ from fossil fuel power plants, before it hits the atmosphere. And eventually that’s going to make a lot of investors rich, from the owners of the technology developers to shareholders of the utilities that own the coal-fired plants and now have a new source of income. The problem with cashing in is there’s no guarantee who will be the successful company bringing the process to market.

Picking Winners

Infratech Editor Gregg Early made several key points about investing in technological breakthroughs in a Sept. 18, 2008 New World 3.0 article, Small Tech vs. Big Tech, Here vs. There. He made several key points about investing in technological breakthroughs. The main one is simply that a winning technology must be accompanied by successful finance and marketing to be commercially successful.

The race doesn’t always go to the swiftest, or even to the company with the best product. Rather, pure play winners have to be ready, willing and able to make the turn from being companies with a great idea to being companies that can execute defined business plans. And given the time lags needed to develop real breakthroughs, that’s simply too high a hurdle for 99 percent of the field.

The Sandia team, for example, anticipates at least 15 to 20 years to commercial deployment of S2P on an industrial scale, even if all goes as planned. Greater investment could well speed up that timetable should experiments prove their worth. But there’s no guarantee either that it will eventually work, or that if it does someone won’t invent something better and faster.

In addition, many of the leading developers aren’t pure plays at all, but relatively minor segments of huge corporations or even governments. Sandia National Laboratories, for example, is a public/private partnership between the US Dept of Energy and Lockheed Martin (NYSE: LMT). Lockheed, of course, should be able to benefit from the S2P project, should the process become economic in the future. At this point, however, the shares are going to follow the pattern of the typical defense company, which is where the majority of its business lies.

The bottom line is this is what makes it so difficult to invest successfully in focused technology plays on CO₂ removal. And the task has been made all the more difficult by the credit crisis, recession and unprecedented drop in energy prices, which has seen banks freeze their lending to smaller alternative energy players across the board.

To be sure, development of economic CO₂ removal has considerably more motivated and deep-pocketed backers than most alternative energy, namely regulated US power utilities. And their motivation to implement new technology will only grow when federal CO₂ regulation becomes law, which will almost surely happen this year.

Power utilities on their own are some of the most reliable bill-payers around. The industry is one of the few that didn’t lever up over the past half-decade, rather electing to pay off debt and cut operating risk. As a result, even this vicious recession and credit crunch has claimed very few victims and most are in very good shape to weather whatever lies ahead.

Finally, utilities cleaning up CO₂ will enjoy the strong support of state and federal regulators. And the likely legislation that will regulate CO₂ will give them plenty of financial flexibility to make the needed investment.

All this is very good news for the developers of CO₂ removal and recycling technology. But again, the list of investable players in this weak environment is relatively short, and very much a work in progress. In fact, the hype that’s likely to follow passage of legislation will actually increase the risk factor.

Staying Conservative

As a result, we’ve maintained a relatively conservative list of CO₂ plays. One is Portfolio pick Kinder Morgan Energy Partners (NYSE: KMP), which already has a substantial presence in CO₂ storage and sales. The CO₂ operations produce, market and transport the gas over some 1,300 miles of pipelines to oil fields, which in turn use it to increase yields from oil wells.

CO₂ comprised 20.7 percent of Kinder’s overall earnings in the fourth quarter, its second-largest segment. Division sales grew 41.5 percent in 2008 over 2007 levels. They should take another leap this year, thanks to the completion of the Goodman Point and Cortez system expansions and a USD290 million project in Colorado that’s nearing completion.

These operations have little or no competition at this point, in part because of the corrosive nature of CO₂ on pipelines means infrastructure must be specialized. No doubt there will be other investors in this area as CO₂ capture becomes more feasible. For now, however, Kinder has the field much to itself.

Kinder is organized as a limited partnership (LP), as is therefore best held outside of IRAs to maximize tax advantages and avoid the potential tax complications inherent in K-1s. But the owner of fee-based infrastructure and payer of a 9 percent-plus quarterly dividend, Kinder Morgan Energy Partners is a strong buy up to USD60.

On the technology side, we still favor Alstom (Paris: ALO, OTC: AOMFF). To be sure, CO₂ control technology is a sideline for the French giant, which employs 76,000 people in 70 countries and does roughly EUR16 billion in annual sales. The company is a leading player in building systems for hydro and nuclear plants, as well as high-speed trains and related infrastructure.

All these are areas that should do well with the surge in government and government-backed spending on infrastructure. The company was enjoying record growth prior to the onset of the global financial crisis. The good news from its fiscal third quarter results (ended Dec. 31) is business is still solid.

Orders of USD7.94 billion beat analyst estimates as the company built a 32-month backlog. Sales rose 11 percent, and management forecast a 10 to 11 percent profit margin at its power systems operations and 7 to 8 percent at its transport division. That estimate included a projected slump in power generation orders, possibly taking fiscal 2010 volume as much as a third below fiscal 2009 levels.

Given that solid picture, the stock is cheap at less than 12 times earnings and 60 percent of sales. And it even pays a dividend of a little over 2 percent. Roughly flat since our original recommendation in November, Alstom is a buy up to EUR45 on the Paris exchange, up to USD50 on the US over-the-counter market.

There will come a time when there will be several strong bets on CO₂ amelioration, both for automobile and power plant applications. But in a year when the growth of the global carbon market is set to slow–with only the US a bright spot–and with funding very tight in the midst of a credit crunch, it’s time to be cautious and wait for opportunity to come to us. Stay conservative on CO₂ for now.