Can the Coal Industry Withstand Challenges Ahead?
The coal industry remains beleaguered, with challenges from domestic and international markets. In the United States, strong competition from natural gas, stringent regulations and additional impetus to solar and wind power generation through the extension of tax credits are steadily luring away utility operators from coal.
Moreover, coal-producing countries like Australia and Indonesia – along with, importantly, a stronger greenback – are making the export market fiercely competitive for U.S. coal players. Per the U.S. Energy Information Administration (“EIA”) release, coal exports – that touched 95.1 million tons in 2017 – will drop to 80.1 million tons in 2018 and further decline to 74.7 million tons in 2019.
Even without the Clean Power Plan, utilities like NextEra Energy (NEE), Dominion Energy (D) and Duke Energy Corp. (DUK) were already investing hugely to create a green energy generation portfolio, and have enhanced their focus on electricity from clean fuel sources.
The Clean Power Plan has been repealed by President Trump. Despite that, new investments are being directed toward natural gas and renewable-based power production due to the clean-burning nature of natural gas and tax credits provided to produce more solar and wind power.
Failing to cope with the continuous fall in demand and declining prices of coal, some coal miners have filed for bankruptcy. In response to the anti-carbon drive, utility operators are shutting down coal-based power plants and directing fresh investments toward constructing natural gas facilities and adding more renewables. U.S. coal production touched its lowest levels in 2016, at 739 million short tons (MMst) since 1978.
Here are some of the severe headwinds that the coal industry is up against:
Natural Gas Substituting Coal: A major substitute for coal in energy generation is natural gas, another fossil fuel. Coal is being dumped in favor of natural gas, which due to extensive exploration and production, and a shale gas boom in onshore United States, is witnessing significantly lower prices than in the past.
Natural gas is an attractive choice for new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. This trend is encouraging power generating utilities to not only convert their existing plants to gas-fired ones but to build new units.
The EIA release showed that natural gas has contributed 32% to the total energy generation in 2017 and its share is expected to go up to 33% in 2018 and further increase 100 basis points to 34% in 2019. Coal contributed 30% to total mix in 2017 and its contribution is expected to fall below 30% in 2018 and drop to 28% in 2019.
In addition to power generation, natural gas is being utilized in new projects in the fertilizer and chemical sectors.
Environmental Legislations: Coal has been losing importance as a fuel source over the last few years, particularly in the United States compared with other sources that are less harmful to the environment. Concerns over the emission of greenhouse gases and global climate change have resulted in the formulation of new legislations and policies which emphasize the use of environment-friendly fuel sources, particularly in the power sector.
This has considerably slowed down the expansion of coal-fired capacity in the power sector, with utility companies now building new natural gas-fired plants and resorting to alternative sources of energy generation like wind, solar and hydro power.
The Trump administration is trying to ease regulations that are hurting the coal industry. Will the United States be able to work in isolation ignoring the emission agreements directed at benefiting everyone? The answer to this question actually holds the key to the coal industry’s prospects.
Duke Energy will invest $11 billion to generate cleaner energy through renewables and natural gas as it moves to a low-carbon future. By retiring coal plants and bringing on more natural gas and renewables, the company has already reduced its carbon emissions by nearly 30% since 2005.
WEC Energy Group Inc. (WEC), a Zacks Rank #3 (Hold) stock, has announced its plan to retire Pleasant Prairie coal fired power plant in second-quarter 2018 and remove nearly 1,200 MW of coal fired production from the generation mix. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
Per the EIA release, nearly 47% of the utility-scale power plants retired in the United States within 2008 to 2017 were powered by coal.
The old and comparative small coal-fired units were retired and this trend is expected to continue til 2020. Emission is one of the primary reasons behind the retirement, along with federal and state policies that impact operation of a plant.
Competition from Alternative Energy Sources: Apart from natural gas, the coal industry has been losing a major share of its electric generation demand to renewable sources of energy. Usage of alternate energy is on the rise, with more utility-scale solar projects being commissioned across the country.
The EIA report reveals that consumption of power produced from renewable sources is rising. Production from renewable (excluding hydroelectric) is expected to increase to 1.089 billion kWh per day in 2018, reflecting an increase of 2.9% from 2017 levels. Production per day is expected to improve to 1.182 billion kWh per day in 2019, reflecting an increase of 8.5% from expected 2018 levels. These renewable additions will eat into coal’s share of electricity generation.