Economics have increasingly not favored coal-fired power plants in the United States in the last decade. The rise of low-cost renewables and natural gas, the reality of an aging coal fleet, and the passage of ambitious state policies aimed at reducing carbon emissions have combined to create a difficult operating environment for the nation's dirtiest power source.

The coronavirus pandemic is going to make a bleak situation much, much worse.

In early April, the U.S. Energy Information Administration (EIA) issued its first monthly energy outlook since stay-at-home orders started in the United States. The key takeaway: Coal could produce the lowest amount of electricity since 1960. 

An excavator working in a coal mine.

Image source: Getty Images.

A worst-case scenario for coal

Coal-fired power plants have had a rough go of things lately. Consider a handful of unflattering statistics spanning total electricity generation, utilization rates, and retirements: 

  • In 2018, the United States retired 13,650 megawatts of coal-fired power capacity. The average age of retired facilities was 46 years, compared to an average retirement age of 60 years in 2011.
  • Power generation peaks during the summer, but the United States is increasingly giving coal the cold shoulder even when the nation mainly relies on air conditioning. That dropped the full-year 2019 utilization rate of America's coal fleet to just 47.5%, down from 67% a decade ago. Utilization rates in New England fell to just 5% last year. 
  • America's coal-fired power plants generated just 966 terawatt-hours of electricity in 2019. That was the lowest annual output since the late 1970s
  • The amount of electricity generated from coal-fired power plants declined by half from 2007 to 2019. According to data compiled by the EIA, a decline of that magnitude had never happened for any power source in any 13-year period since the United States was founded in 1776.
  • Last year's mild winter led to a 5% year-over-year decline in total U.S. electricity demand in January 2020. Coal-fired power plants were the biggest losers, experiencing a 35% drop in output in that period.

That's the backdrop against which the coronavirus pandemic is unfolding. Earlier this month, the EIA published a short-term energy outlook (STEO) projecting further deterioration of the market environment for coal-fired power plants.

The EIA expects total U.S. electricity demand to fall 3% in 2020 compared to last year. That would mark the second-largest year-over-year decline since the Great Recession in 2009. But not all power sources will be affected equally. 

Renewable energy power sources are expected to grow output 11%. That's because wind and solar farms have low operating costs (wind turbines and solar panels don't need fuel), so power generators will be forced to take either natural gas or coal capacity offline to adjust to declining demand (nuclear plants require fuel, but cannot be turned off easily). Surging wind and solar capacity additions from 2019 and 2020 will also help to drive growth.

Older, less efficient fossil-fuel power plants will be the least likely to grow market share. The EIA expects a 1% increase in natural gas-fired power plant output (that might be a little low given recent price trends). Meanwhile, coal-fired power plants are expected to generate 20% less electricity in 2020 than in 2019. That would drop output to the lowest level in 60 years and have major implications for individual investors.

Transmission line towers.

Image source: Getty Images.

Brace for impact on the power sector

Investors have already taken the impact of the coronavirus pandemic into account for coal miners such as Alliance Resource Partners (NASDAQ:ARLP). The coal producer was forced to idle certain mines, suspend its quarterly distribution, and significantly reduce full-year 2020 production guidance. Initially expecting output of about 36.5 million tons this year, the partnership now expects production of only about 28 million tons. 

That lines up with broader trends. For the week ending April 11, the country's year-to-date coal production was 18% lower than for the same period in 2019. The EIA expects U.S. coal production to decline 22% from 2019 to 2020, driven by lower domestic demand and declining opportunities for exports to the European Union and India as they deal with health crises of their own. 

Investors will also need to consider how the pandemic affects power generators and electric utilities. All will be impacted, but the geographic distribution of renewable energy potential and natural gas infrastructure -- likely to be the most resilient in the face of quickly declining electricity demand -- suggests the impacts could vary widely across the country. 

Energy companies that are heavily reliant on renewable energy and don't own many coal assets, such as NextEra Energy and Xcel Energy, might be a little more resilient during the power sector downturn of 2020. The same might apply to companies that lack access to high-quality renewable assets but moved quickly to transition away from coal and toward natural gas.

Take Dominion Energy (NYSE:D) as an example. Coal had a 52% share of the company's power mix in 2005, but just 12% in 2019. That suggests the business should be able to blunt economic risks compared to peers that are more reliant on coal.

Dominion Energy could also benefit from the customer mix of its leading electric utility, Dominion Energy Virginia, which is expected to contribute 47% of total earnings in 2020. The subsidiary leaned on commercial customers for roughly one-third of operating revenue in 2019. While electricity demand among commercial customers is expected to fall 4.7% in 2020 across the U.S., the utility sells nearly 30% of its commercial load to data centers -- a customer group that likely won't see waning demand during the pandemic. 

The main takeaway is that investors need to evaluate companies on a case-by-case basis rather than making broad generalizations for the industry.

Can coal recover from a terrible 2020?

The COVID-19 pandemic and policies to mitigate it are expected to significantly reduce total U.S. electricity demand. When combined with milder temperatures and surging capacity for renewable energy power sources, investors can expect coal-fired power plants to struggle in 2020. 

While an economic recovery in 2021 or 2022 would be accompanied by an increase in energy consumption, the market share gains made by renewable energy and natural gas might prove permanent, especially considering coal assets will be two or three years older by the time a recovery takes place. Simply put, America's coal fleet has had it rough in recent years, and it might not recover from the coronavirus pandemic.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.