Airplanes are grounded. Businesses have closed. Cars are off the roads. The coronavirus pandemic and the early efforts to mitigate the health crisis have driven a precipitous fall in demand for transportation fuels and electric power. Lower energy consumption means lower carbon dioxide emissions. In this case, the year-over-year decline is expected to be a record.
The U.S. Energy Information Administration (EIA) expects energy-related carbon dioxide emissions to decrease 11% in 2020 compared with last year. While some analysts have warned that the climate progress will be short-lived and that emissions could rise significantly when the economy picks up again, a closer look at the consequences of the coronavirus pandemic suggests a surprising amount of economic decarbonization will be locked in permanently. Here's what it means for renewable energy stocks.
What affects energy-driven carbon emissions?
Factors such as weather, economic activity, energy prices, and fuel mix affect energy-related carbon emissions, which primarily comprise electricity generation and transportation fuels. Knowing that, it makes sense for emissions reductions that occur primarily due to an economic slowdown would be followed by emissions growth during an economic recovery.
In the EIA's most recent forecast, the 11% decline in energy-related carbon emissions in 2020 will be driven by reduced energy consumption. Demand for electricity is expected to fall 5% compared to last year -- a record year-over-year tumble equivalent to turning off the country's power supply for 18 days -- driven by both a mild winter and stay-at-home orders. Consumption of motor gasoline is expected to decrease 11% compared to last year, while demand for jet fuel and diesel fuel are expected to fall 25% and 10%, respectively.
However, the EIA expects energy-related carbon emissions to increase 5% in 2021 as economic activity rebounds. There's a fair amount of uncertainty hanging over current events right now, so these projections could change as analysts accumulate more data. That said, despite the expected increase in 2021, current estimates suggest most of the carbon reductions will stick around.
If the EIA's current short-term projections come true, then U.S. carbon emissions from energy consumption will decline by 345 million metric tons from 2019 to 2021. That would keep annual energy-related carbon emissions below 5 billion metric tons for two consecutive years, which hasn't happened since the 1980s.
Whereas increasing demand for transportation fuels will drive increases in carbon emissions in 2021, increasing demand for electricity is much more likely to be met -- perhaps entirely -- by low- and zero-carbon power sources.
Booming renewables, steady natural gas, and collapsing coal
All of the primary factors that determine energy-related carbon emissions -- weather, economic activity, energy prices, and fuel mix -- are pointing in the direction of a rapid decarbonization of the power sector. Simply put, there are unprecedented headwinds facing coal-fired power plants and historic tailwinds for renewable energy sources.
- Weather: A mild winter drove a 2.3% year-over-year decline in U.S. electricity demand in the first two months of 2020. Electricity generation from coal-fired power plants declined 33% in that span.
- Economic activity: The EIA expects a slowing economy to drive a 5% decline in electricity demand in 2020 compared to last year. Electricity generation from coal-fired power plants is expected to decline at least 25% this year.
- Energy prices: Natural gas and onshore wind were already the lowest-cost power sources, but tumbling natural gas prices and the presence of government subsidies for renewable power generation will compound the advantages.
- Fuel mix: Power generators are racing to capture an expiring production tax credit (PTC) for wind farms and a depreciating investment tax credit (ITC) for solar farms. That's expected to drive a record 20,400 megawatts of new wind capacity and 12,700 megawatts of new utility-scale solar capacity in 2020. The EIA expects electricity from renewable energy sources to increase 11% this year, stealing a record amount of market share.
The emissions reductions in the power sector will be permanent because the market-share loss of coal-fired power plants will be permanent. Power generators are increasingly idling those assets (utilization rates have fallen from 67% in 2010 to below 40% in early 2020) or sending them to an early retirement. Coal-fired power plants won't recover once the economy rebounds from the upcoming recession, especially not after the country adds over 33,000 megawatts of renewable energy capacity in regions where coal currently dominates.
That's likely to accelerate the energy transition. Take Xcel Energy (NASDAQ:XEL) as one guiding example. The company's consolidated power mix leaned on coal for 56% of electricity generation in 2005, but that fell to 26% in 2019 and is expected to fall to 15% in 2030. Renewable energy could generate 60% of the company's electricity by then.
However, depending on the strength of the economic headwinds facing coal in a post-pandemic world, investors might wonder if the timeline will be accelerated. Xcel Energy has an estimated 2,085 megawatts of coal-fired generating capacity scheduled to retire between 2025 and 2030. Could it apply to regulators for an even earlier wind down of those assets?
An accelerated energy transition suggests a bleak future for coal producers such as Alliance Resource Partners (NASDAQ:ARLP). A mild winter and the coronavirus pandemic forced the company to slash full-year 2020 coal production guidance by 25% compared to original expectations. The partnership was also forced to suspend distribution payments -- previously sporting a double-digit annual yield -- to preserve its balance sheet.
If coal is incapable of regaining market share when the economy begins to recover, then investors might need to rethink their long-term projections for Alliance Resource Partners and its peers.
This year's climate progress has staying power
The EIA expects energy-related carbon emissions to fall by double digits in 2020 compared to last year. While the historic year-over-year decline will be driven primarily by reduced consumption and economic activity caused by the coronavirus pandemic, multiple other factors would have driven a relatively sharp decline without the health crisis.
The country is bound to see an uptick in emissions as consumption and the economy recover, but a significant amount of the decarbonization taking place in the power sector is likely to be permanent. Therefore, investors should begin planning for the energy transition to accelerate -- and contemplate the opportunities and challenges ahead.