Renewables may be hot, but natural gas is becoming the biggest provider of America's electricity generation needs. The U.S. Energy Information Agency (EIA) expects that from 2012 to 2040 natural gas will grow from 30% to 35% of total U.S. generation. In the same time frame renewables are only expected to grow to 16% of total U.S. electricity generation. If we really want to dethrone coal and make America greener, natural gas is a very effective tool.
What about solar?
Electricity demand peaks from noon to 7 PM. Peak demand happens when the sun is shining, helping companies like First Solar (NASDAQ:FSLR) compete with expensive natural gas peakers.
Its strong utility sales give the company a healthy profit margin of 12.2%. First Solar's expanding sales operations and proven experience have helped it drum up a good sized 7.7 GW DC project pipeline, but the majority of the pipeline is still early stage.
First Solar's biggest challenge will come once North American utilities have already replaced the majority of their natural gas peakers with solar. Non-peaker natural gas plants have levelized costs of energy (LCOE) as low as $67.1 per MWh, far below solar's LCOE.
So where is natural gas' growth coming from?
At first it sounds nonsensical that natural gas is expected to grow more than renewables and yet solar is currently growing by replacing natural gas. What you need to remember is that utilities only have a few peaker plants and they are not used that often. In a 2012 regulatory submission Southern California Edison expected that five of its peaker plants would only run for an average of 282 hours in the year, a little less than 12 days of continual use.
Natural gas is growing by replacing baseload or seasonal baseload generation. The EIA expects that almost 50 GW of coal generational capacity will be taken offline between 2012 and 2020. This change will not happen instantaneously, but utilities are slowly shutting down many of their old coal plants.
CONSOL Energy (NYSE:CNX) has seen the difficulties facing high-cost coal miners. Back in October of 2013 it sold five longwall mines and a number of related assets that had produced 28.5 million tons of thermal coal in 2012. By reinvesting the $3.5 billion from the mine sale into its Marcellus shale assets CONSOL is taking a very proactive approach. It expects that it will be able to grow its gas production 30% annually from 2014 to 2016, aligning CONSOL with utilities' interests.
The last thing CONSOL wants to do is end up like Arch Coal. Arch has a number of unprofitable mines in the Appalachia region. Until it is willing to eject or permanently shut down these assets there is a good chance it will continue bleeding cash.
In 2013 it lost $663 million from operations and its adjusted EBITDA fell from $689 million in 2012 to $426 million in 2013. In 2013 its bituminous thermal segment had positive operating margins, but its falling per ton operating margin and falling sales decreased the segment's ability to subsidize Appalachian losses.
Look at America's number one natural gas producer
As the decade passes natural gas producers will have a bigger market and a wider customer base to work with.
ExxonMobil (NYSE:XOM) is one of the most powerful energy companies in the world and according to recent data from Q1 to Q3 2013 it is also America's biggest natural gas producer. It is trying to shift more of its production toward higher margin liquids-rich assets, but in Q4 2014 ExxonMobil still managed to produce 3.46 billion cubic feet per day of natural gas in the United States.
It remains to be seen if solar manufacturers like First Solar can break into the baseload generation market without subsidies, but natural gas is already picking up steam. As the U.S. slowly replaces coal with natural gas ExxonMobil and CONSOL Energy will be ready to benefit from higher demand. Investing in an integrated firm like ExxonMobil gives you the stability and security that is hard to find in smaller E&Ps, but CONSOL Energy offers big upside potential as well.