Five years ago, coal provided nearly half of all the electricity consumed in the U.S. Oh, how the mighty have fallen.
Today, the coal industry is rapidly going out of business. Coal plants are being shut down, miners are going out of business, and even import countries like China and India are turning their backs on coal. How did we get here and is a recovery ever going to take place? The answer may surprise you.
The coal conundrum
Renewable energy gets a lot of credit for the decline of coal. But if you want to know the real reason coal companies are struggling, you don't have to look further than natural gas. You can see in the chart below that natural gas generated about half the electricity coal did as recently as five years ago, but today natural gas is the No. 1 electricity source in the U.S.
This decline in coal consumption helped cause the decline in coal prices and demand that pushed Patriot Coal, Peabody Energy, Arch Coal, and others into bankruptcy. And more mines will go out of business if the trend continues.
But over the long term, it's the fact that investors, banks, and utilities have lost faith in coal that will lead to a further decline. A decade from now, coal could be a very small player in the U.S. energy picture.
Banks give up on a coal rebound
Coal stocks have been doing terribly for years, but if bank financing dries up, it'll sink the industry. Deutsche Bank recently lost six key bankers in its coal finance business and used that as an opportunity to get out of the business. The California State Teachers' Retirement System, which controls $186 billion, has abandoned its coal investments. France's largest insurer, AXA, has said it will sell all of its coal assets by the end of the year. Even bank giant JPMorgan is cutting back its financing of coal projects.
There are dozens of major investment funds and banks that have divested from coal, making it harder for coal mines and coal plants to find financing. And coal's difficulties aren't helped by the fact that natural gas is now a cheaper fuel for electricity.
Fighting an uphill battle
It may be appealing to project a recovery for coal eventually. After all, it's only been a few years since coal seemed to be a major source of energy in the U.S. and around the world. But renewable energy has made the climb back almost impossible.
And trends at utilities show why a recovery is unlikely in the future. Duke Energy (NYSE:DUK), once the largest coal consumer in the country, has retired 17 coal plants in the last five years and has another three on the retirement schedule. American Electric Power (NASDAQ:AEP) has shut down 6,500 MW of coal plants in the last five years from 11 power plants. And Southern Company (NYSE:SO) will lose millions trying to build a "clean coal" plant that has ended up being years behind schedule and billions of dollars over budget.
These are just three companies that were involved in coal, but they've all transitioned to investing in wind and solar rather than coal. The simple reason is that renewables are a way to make money and coal is increasingly a money-losing proposition. Not even cheap coal can change that dynamic.
Don't count on a coal recovery
Most coal miners have already gone bankrupt, so investors will have a hard time betting on a recovery in the sector. But even utilities that have coal assets will likely have to retire them and build cleaner sources of electricity. Coal is a dying energy source, and the future belongs to natural gas and renewable energy. That's a reality investors should get used to.