Can Shifting Electric Supply Power Investment Opportunity?

March 10, 2016

Can Shifting Electric Supply Power Investment Opportunity? Photo

Republican Presidential hopeful Donald Trump declared back in September, “I believe in clean air. Immaculate air, but I don’t believe in Climate Change.” Both Democratic Presidential candidates would agree with Trump’s support for clean air but would take issue with his stance on Climate Change. Regardless of which side of the Climate Change debate you come down on, the trends toward cleaner power generation in the U.S. are difficult to question.

This week’s chart shows the shift in U.S. electricity generation since 2000 and the projected generation mix until 2040. It illustrates the movement away from an era where coal provided the majority of the nation’s power to a future relying on natural gas and to a lesser extent renewables as alternatives.

The changing power landscape is the result of several factors, including aging generation infrastructure, weak growth in demand for power, environmental regulation and new generation technology. With all the bad press coal has gotten, it still accounts for about 40% of electricity generation. At the end of 2010, 73% of coal-fired power plants were 30 years old or older. Also, 76% of the carbon emissions from the power generation industry are from coal-fired power plants. According to Tim Worstall at, “Compared to the average air emissions from coal-fired generation, natural gas produces half as much carbon dioxide, less than a third as much nitrogen oxides, and 1% as much sulphur oxides at the power plant.” Recent environmental regulation, coupled with low natural gas prices, will continue to accelerate the trend toward natural gas fired power plants.

On the regulation side, the Clean Power Plan unveiled in August 2015 by the Environmental Protection Agency (EPA) and President Obama is aimed at reducing carbon emissions from power plants. The implementation of the new regulation was stayed pending judicial review by the Supreme Court on February 9, 2016, but, if enacted, it would accelerate the changing composition of the nation’s power generation and further pressure coal generation, which has already been targeted by the EPA under the Mercury and Air Toxics Standards.

Adding fuel to the fire, natural gas prices hit historic lows for the week ending March 2, 2016 at $1.79/MMBtu. These factors make natural gas an attractive alternative to coal, but significant investment will be needed to drive the transition to natural gas fired power plants. In fact, according to the U.S. Energy Information Administration, in the longer term, natural gas will account for more than 60% of the new generation needed from 2025 to 2040 and growth in generation from renewable energy will supply most of the remainder.

Key Takeaway: Managers with expertise in developing and managing the next generation of assets that will power the U.S. electric supply will have tail winds from the shift in the nation’s power generation landscape. Additionally, partnering with those that have the ability to acquire assets with access to lower cost fuel sources and ability to drive efficient generation will have a decided competitive advantage and will likely drive returns for their investors.

Tags: Chart of the Week | Energy | Climate change | Coal | Natural gas | Renewables | Supreme Court | U.S. electric supply

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