America's coal-fired power plants sank to new lows in 2019. Investors hoping last year marked a bottom won't find any relief in the latest electricity data. 

The nation's coal fleet generated only 65 terawatt-hours of electricity in January 2020, according to numbers compiled by the U.S. Energy Information Administration (EIA). That marked a 35% decline from the year-ago period and the first time in decades that coal-fired power plants failed to deliver more than 100 terawatt-hours of electricity in January. 

The latest numbers confirm what individual investors likely already know: The United States is increasingly ditching coal in favor of natural gas and renewable energy. That poses challenges and opportunities for your portfolio.

Electric power lines, seen against a sunset backdrop..

Image source: Getty Images.

A little context

What the heck just happened? A mild winter, lower natural gas prices, and increasingly stringent environmental policies at the state level all contributed to the poor performance of coal-fired power plants in January. The confluence of factors is pressuring coal on two fronts: total operating capacity and utilization rates.

Many coal-fired power plants are being sent to an early retirement. While the United States had a relatively large 229,000 megawatts of coal-fired power capacity in January 2020, that was about 13,000 megawatts lower than the operating capacity in January 2019. That may not seem like a significant reduction, but it's not the whole story. 

The coal fleet that remains operational is increasingly being idled. Numbers aren't yet available for January 2020, but the nation's coal-fired power plants recorded a full-year 2019 utilization rate of only 47.5%. Ten years ago, the figure was over 67%. 

The combination of retirements and lower utilization has led to an unprecedented collapse in coal's contributions to the nation's power mix. Last year, the nation's coal fleet delivered its lowest annual amount of electricity since the late 1970s. From 2007 to 2019, the electrical output of the country's coal fleet fell by more than half. It was the first time that had happened for any energy source (including the wood burned in the colonial era) in any 13-year period since the United States was founded in 1776, according to data compiled by the EIA. 

Coal's collapse continues to outpace most projections -- and create opportunities for natural gas, onshore wind, and solar to grab market share. Here are several other highlights from the January 2020 data: 

  • The country's total electricity consumption declined 5% year over year. 
  • Natural gas-fired power plants kept their momentum going. After generating a record amount of electricity in 2019, the nation's fleet grew year-over-year electricity generation 11% in January 2020.
  • Nuclear power plants are bracing for a wave of reactor retirements but managed to deliver a record level of electricity in 2019. They're also beginning to outperform coal. The nation's nuclear fleet has only ever outproduced the nation's coal fleet in three months: April 2019, December 2019, and January 2020.
  • The United States typically sees its wind resource peak in April and October, but a wave of capacity additions in late 2019 led to a surge in electricity generation. Onshore wind power generated a January-record 28 terawatt-hours of electricity this year. 

The ongoing energy transition has big implications for your portfolio.

What does it mean for investors?

The decisions to retire or idle coal-fired power plants comes down to economics -- and economics are difficult to argue with. Case in point: Even power generators and electric utilities with the most favorable coal economics or most severe lack of alternative power options have been forced to decarbonize their assets.

PPL (NYSE:PPL) operates in Kentucky, Pennsylvania, and the United Kingdom. Kentucky has an ample supply of coal, as evidenced by the fact that the company generates 78.5% of its total electricity in the state from coal-fired assets. Yet the business caved to shareholder pressure in 2017 to implement a long-term emissions reduction plan. It has already had to accelerate those goals. 

The company now expects to reduce carbon emissions 70% by 2040 compared to 2010 levels, which is 10 years faster than previously expected. It'll likely be achieved even earlier than that. Investors could benefit if the goal is achieved with lower-cost natural gas or solar, which are increasingly being favored in Kentucky. PPL delivered stagnant revenue and earnings growth from 2015 to 2019, but it has seen long-term debt and the number of shares outstanding increase 15% and 14%, respectively, in that span. 

New England offers another case study of the energy transition. The region isn't Kentucky, but it remains relatively energy-poor. It doesn't have ample onshore wind or utility-scale solar potential and must import all of its natural gas via pipelines or carrier. That's forced some creativity on the part of electric utilities looking to ditch coal. 

Eversource Energy (NYSE:ES) has invested heavily in energy efficiency measures, transmission infrastructure, and offshore wind power. The latter is uniquely suited to become a dominant power source in the region. Offshore wind power is virtually nonexistent in the United States today, but it could become the leading source of renewable energy in New England. That's especially true considering most of the region's population lives in coastal metropolitan areas. 

The company forged a partnership with Orsted (OTC:DOGE.F), the world's leading offshore wind developer, to develop up to 4,000 megawatts of the next-generation renewable energy source in the next 10 to 15 years. That should help Eversource Energy meet increasingly strict environmental policies at the state level. For example, Massachusetts mandates nearly 39% of total electricity come from renewable sources by 2025, up from 25% last year. 

Train cars filled with coal.

Image source: Getty Images.

Is this coal's last decade?

American coal-fired power plants kicked off 2020 with one of the worst operational performances ever. Some of this is already penciled into short-term outlooks. For instance, the EIA estimates that coal will provide just 21% of the nation's electricity in 2020, down from 23.5% in 2019. 

However, investors should consider that the fall of coal and the rise of renewables have both been consistently underestimated in projections. As recently as 2017, the EIA expected coal to provide 22% of the nation's electricity at midcentury. It's unlikely that coal will be completely booted from the American grid by the end of this decade, but, conversely, investors shouldn't expect a bottom to be reached anytime soon. Therefore, it's best to carefully weigh any exposure your portfolio might have to coal-fired power plants -- and ensure those risks are being successfully mitigated with long-term thinking and decarbonization efforts.