We all need energy to eat, breathe, walk, talk, and even sleep. But I often wonder if people actually take time to think about how many of our seemingly mundane, daily tasks require energy, notably electricity. Turning on the coffee pot, starting the laundry machine, heating or cooling the office, charging a device, and other processes all come to mind. Indeed, power generation and consumption are core components of our lives.
So naturally, I ask: what is the primary source of electricity? And, as an investor, how can I benefit?
Historically, coal has been the go-to source for electricity generation.But due to the booming U.S. natural gas industry, notably within Appalachia, natural gas is on a fast track to be the primary source for electricity in America within 3.5 decades.The U.S. Energy Information Agency says:
New natural gas-fired plants are much cheaper to build than new renewable or nuclear plants. In 2016, the year that MATS (Mercury and Air Toxics Standards-a regulatory standard) is assumed to be implemented and coal-fired generation hits its lowest point, natural gas-fired generation in AEO2013 is 10% higher than in AEO2012 (and in 2035 it is still 9% higher).
The below chart depicts the scenario:
Source: EIA
Why investors should care
Barring unforeseen global or governmental circumstances, investors can reap massive gains from the aforementioned phenomenon, particularly in the coming years.
How? Invest and wait. Three firms come to mind for two types of investors.
Those willing to embrace more risk should consider CONSOL Energy (CNX 0.98%), one of the largest coal producers in America.To stay relevant, CONSOL's managers are adjusting to current times. For example, CONSOL, which is headquartered in the heart of Marcellus and Utica shale plays in the Appalachian basin, has increased its net gas reserves 286% over the past five years. In fact, CONSOL continues to expand its footprint within the natural gas industry.
Around 66% of electricity consumed is from coal and natural gas.CONSOL is meeting current coal demand; for instance, it provides about 6.5% of the total U.S. electricity supply.At the same time, it is positioning itself to reap benefits from the natural gas boom. In addition to these two fundamental, strategic business approaches, CONSOL offers shareholders a consistent dividend payment, currently around 1.5%.
Utility companies are attractive, too
Investors who tend to be more risk averse but still want to dabble in opportunities for growth should consider Duke Energy (DUK +0.70%) and Southern Company (SO 0.05%).
Duke Energy is primarily known as a utility company. As such, it can sometimes operate like a monopoly in the regions it serves due to a lack of competition. Therefore, Duke investors can rest assured that it is not greatly affected by exterior market conditions. In fact, it only has a beta of .11, indicating that it is not greatly affected by market conditions. Additionally, Duke offers a 4.8% dividend yield.
In addition to providing electricity and gas to its customers, Duke owns and generates around 6,800 megawatts of energy from natural gas, coal, and renewable energy, proving that it diversifies potential risk across various energy generating sources. Reverting to the above image indicates that Duke is an entrenched firm that is positioned for the future.Additionally, because Duke produces some of its own energy, it hedges itself against major price fluctuations in the electricity market. Also, it operates a business unit that builds, owns, and operates transmission lines across the U.S.Again, in so doing, it is able to act like a monopoly, control more external factors than competitors, and generate greater value for investors.
As one of the largest producers of electricity in America,Southern Company will generate investor value long into the future because, similar to Duke, Southern enjoys monopoly-like benefits. Southern boasts a beta of .05 and offers investors a 5% dividend yield. Therefore, income seeking investors should consider holding Southern.
Ultimately, as long as electricity consumption is required to maintain our standard of living, generation is a necessity. Therefore, by diversifying across the top electricity-producing sources or by operating in industries with high barriers to entry, these companies are positioned to reap benefits for investors.
