The health of America's aging fleet of coal-fired power plants continues to sink to new depths. According to the latest batch of data from the U.S. Energy Information Administration (EIA), coal-fired power plants produced just over 60,000 gigawatt-hours of electricity in April 2019, or about 20% of demand. That marked the lowest level in decades. But it wasn't the only first for the country's energy grid.
April was the first time ever that nuclear power outproduced coal. It was also the first time ever that wind, solar, and hydropower combined to outproduce output from coal-fired facilities. Together, zero-carbon power sources generated over 43% of total electricity in the United States. It's just the latest data point demonstrating the shift underway in the nation's power grid. Is your portfolio taking that into account?
A little nuance goes a long way
On one hand, there are permanent forces driving the historical performance seen in April. On the other hand, moderate temperatures significantly reduce heating and cooling demand for much of the country every April, which makes it the low point of the year for electricity demand. In recent years, that's been compounded by the fact that the fourth month on the calendar is typically one of the strongest for wind power.
Power generators take advantage of -- or, in the case of wind power, are forced by -- the seasonality to perform routine maintenance at their facilities. Therefore, April data typically reflects the lowest monthly output levels for all thermal power plants, although coal is clearly on the ropes. Consider that:
- American coal-fired power plants saw electricity generation in April 2019 fall 18% from the year-ago period and 26% from April 2017.
- American coal-fired power plants are on pace to generate the lowest annual output of electricity since the 1970's, when the country consumed 46% less electricity.
- American coal-fired power plants are expected to comprise just 24% of the nation's electricity production in 2019, down from 50% in 2005. That suggests the EIA's headline-grabbing forecast in which coal generates 22% of American electricity in 2050 is... a little optimistic.
- Nuclear power plants generated a record amount of electricity in 2018, and then followed that up with their highest April output in years -- and perhaps ever. Can that continue in the face of planned reactor retirements?
- Wind power surpassed 30,000 gigawatt-hours of generation in a month for the first time. It should eclipse that mark this fall on its way to becoming America's top renewable-energy source this year.
Low-cost natural gas, wind, and solar and aggressive state-mandated clean-energy plans are expected to continue sending coal-fired power plants to early retirements. That explains why the EIA expects coal consumption to drop to 602 million short tons in 2019 and just 567 million short tons in 2020 -- each marking the lowest level in over 40 years. Investors should take notice.
Prepare your portfolio
The immediate takeaway from April's data and the latest EIA outlook is that coal is going extinct in the United States. Since that's driven almost entirely by economics, power generators and electric utilities stubbornly hanging on to their coal-fired power plants might be costing ratepayers and shareholders. While geographic realities dictate power asset portfolios, that tussle is increasingly playing out between natural gas, wind, and solar -- not coal.
Dominion Energy (NYSE:D), one of the largest power generators suffering from its geographic location away from favorable onshore wind potential, is switching to natural gas and even converting some of its coal-fired power plants to run on wood pellets. That may seem a stretch, but the company's operations are close to the world's most robust pine forests and wood products industry. (Most wood pellets are manufactured from residuals, not directly from trees.)
Even PPL, which operates in coal-friendly Kentucky, has announced a shift toward natural gas power plants in a bid to reduce its emissions profile. In 2016, the company leaned on coal for 85% of its generation mix, which represented 3% of the nation's total coal fleet, but current projections call for most of that to be retired in the coming decades. It's reasonable to expect economic realities will move up the timeline even earlier.
That poses a risk for coal producer Alliance Resource Partners (NASDAQ:ARLP), which generates 10% of total revenue from PPL subsidiaries. The coal miner reported record production of 40.4 million short tons of coal last year -- while consumption in the United States dropped to a 39-year low -- but the business has increasingly relied on exports in recent years. Whether or not international markets can stave off predictions for sharply declining operations, investors might only need to consider that shares have lost 39% of their value with dividends included in the past five years. That's a 100% difference from the total return of the S&P 500 in that span.
A reduced appetite for coal could present opportunities for NextEra Energy (NYSE:NEE). The company's subsidiary, NextEra Energy Resources (NEER), is the largest power generator in the United States. It builds, owns, operates, and sells power generation assets across the country. In addition to owning 17,000 megawatts of renewable energy assets today, it boasts a backlog comprising over 29,000 megawatts of wind and solar. As more and more companies retire their coal fleets, they'll increasingly tap NEER to replace the lost output with newer, cleaner, and lower-cost facilities.
Don't get caught off guard
April's power generation data reflects both seasonal realities and irreversible trends such as the fall of coal and the rise of renewables. The numbers show that American electric grids are transitioning to a lower-carbon future, and perhaps sooner than many projections currently expect. Investors with a long-term mindset shouldn't get caught off guard by the risks and opportunities the shift is creating.