Regardless of your opinion on climate change, the Environmental Protection Agency (EPA) recently announced plans to make power plants reduce carbon emissions by 30% by the year 2030.
From the June 2, EPA press release:
Cut carbon emission from the power sector by 30 percent nationwide below 2005 levels, which is equal to the emissions from powering more than half the homes in the United States for one year.
The EPA proposals are expected to hit coal-fired power plants, and the states that produce and use coal, hardest according to USA Today.
The EPA proposals suggest that natural gas and renewable energy sources should make up the difference, and due to its lower costs natural gas has already replaced coal in many plants and now makes up 30% of U.S.electric generation, nearly matching that of coal at 37%. Wind and solar production have also increased dramatically, but until production-level grid power storage systems are perfected these power sources will likely remain minor contributors.
Mexico to increase natural gas demand
Couple the EPA news with the announcement from the U.S. Energy Information Administration that Mexico projects rapid near-term growth of natural gas imports from U.S. producers. This new demand will increase U.S. export demand to Mexico from 1.8 billion cubic feet per day (Bcf/d) in 2013 to 3.8 Bcf/d by 2018. As such, one can conclude that natural gas demand will likely continue to rise while coal demand will fall.
Pipelines are the key
There are, of course, many players that will benefit in the markets from these changes in demand and many that will be punished. Of the winners, infrastructure delivery resources are critical. Natural gas will need delivery to both the eastern U.S. and to Mexico. The Texas Eastern Transmission Company, owned by Spectra Energy (NYSE:SE), Kinder Morgan Border Pipeline LLC, and Shell Energy North America, owned by Royal Dutch Shell (NYSE:RDS-A) are all well positioned to handle this demand. Each company has existing pipelines into the Northeast and throughout the U.S., as well as three of the largest existing lines into the northeastern state of Tamaulipas, Mexico. It is this region of Mexico where the EIA reports that the greatest increase in demand will occur.
A map of the coal-fired generating plants that are already scheduled for retirement due to existing EPA pollution regulations follows the major pipeline pathways that already exist from the south to the northeastern U.S.
Companies that profit from these overlapping corridors will profit from the implementation of existing regulations as well as the upcoming changes in regulation and demand.
Natural gas demand is going up in the long term. Both existing and proposed government regulation are likely to increase demand, and the new demand from Mexico will increase U.S.exports, which will further increase overall natural gas demand. Many companies could benefit, but the major pipeline companies that are well positioned to deliver natural gas to both of the new demand regions will benefit greatly.