Coal’s Decreasing Role in Power Generation Begins

by David Fessler, Investment U Senior Analyst

Monday, August 1, 2011

During the first three months of this year, the amount of power generated by coal-fired power plants hit its lowest level in more than 30 years.

U.S. coal-fired plants provided 440 terawatt hours (TWh) of power in the first quarter.

That 26.5 TWh drop is six percent less than the year before. In spite of the fact that overall generation decreased in the United States by less than one percent.

Take a look at the graph below from the Energy Information Administration (EIA) and you can see coal’s contribution as part of the overall power generation, and how it’s well below its historical 30-year range.

Coal was responsible for 46 percent of all of the power generated in the United States in the first quarter. That’s three percentage points less than last year and a full six percentage points less than the first quarter of 2008. That’s a huge drop in coal!

Coal Taking a Back Seat to Natural Gas

What’s going on here? Prices for one: The spot price of coal was on the rise for almost two years. Natural gas prices, on the other hand, went the other way. With all the new shale gas coming online, prices will likely remain low for at least the next year.

That big cost difference has utilities increasingly switching to natural gas to fuel new generating stations. They’re also converting old coal-fired plants over to natural gas or shutting them down entirely.

As you can see from the EIA’s chart below, even the Midwest region – where coal was generally the dominant fuel – is seeing its share decline.

• In the Midwest, coal’s share of power generation dropped from 70.5 percent last year to 66.9 percent, nearly all at the expense of natural gas.

• The South saw its use of coal decrease by seven percentage points,

• The Northeast by eight percent and

• The West by 2.6 percent

The EIA estimates that coal will see higher usage in the second quarter. That’s primarily due to nuclear plant refueling outages. These typically occur during the April to June time-frame.

The bottom line is that coal use is taking a big hit due to the disparity in price between it and natural gas. Since overseas demand for coal remains strong, prices will likely remain high, and coal stocks will continue to do well.

The opposite is true for natural gas prices, since we still have a huge glut of it in this country, and will for some time to come.

The Best Way to Play the Shift Away from Coal

The simple answer is that you play the shift towards natural gas. Rather than pick a natural gas driller or producer, the best way to play natural gas is to invest in a natural gas transmission company.

One of my favorites is El Paso Pipeline Partners, LP (NYSE: EPB). El Paso owns and operates both natural gas transmission and storage pipelines. Its various subsidiaries, Southern LNG Company, LLC, Elba Express Company, LLC and Wyoming Interstate Company, LLC, are a few of the numerous subsidiaries El Paso owns or has partial ownership in around the United States.

• El Paso gets paid to store and move natural gas around. As power companies increasingly adopt natural gas as their fuel of choice to replace or repower old coal-fired plants, El Paso’s business will only increase.

• For those income-oriented investors who want to play the energy space but are concerned about the volatility of oil prices, El Paso represents the best of both worlds.

• Not only will you likely see share appreciation in the months and years ahead, you’ll receive a nice dividend payment while you wait. At current share prices, El Paso currently sports a 5.44 percent yield.

El Paso is just one of many pipeline operators in the United States, but it’s a “pure play” on natural gas transmission and storage.

Investors wanting to play the switch away from coal might want to consider adding a few shares of El Paso to their energy portfolio.

Good investing,

David Fessler