by Robert Rapier, Investing Daily
Article of the Week from Investing Daily
Since the turn of the century, a revolution has been underway in the power sector. The primary casualty has been the U.S. coal industry, while the winners have been natural gas, renewables, and the atmosphere. Energy sector investors should heed this virtually unstoppable trend.
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According to data from the Energy Information Administration (EIA), in the year 2000, 71% of U.S. electricity generation was derived from fossil fuels. By 2017 the fossil fuel share had fallen to 63%.
But that decline is entirely because of a move away from coal for power generation.
Coal’s share of U.S. electricity generation between 2000 and 2017 fell from 51% to 30%. Renewables get a lot of credit for this decline, but the truth is that natural gas took the lion’s share of coal’s market share. Over the past 17 years, the natural gas share of power production doubled from 16% to 32%. Natural gas is now the largest source of power in the U.S. (Nuclear power’s share was 20% in 2000 and in 2017.)
Renewables have grown as well. The total renewable share rose from 9.5% to 17%, but hydropower has always been responsible for the largest renewable contribution. In 2000 hydropower accounted for 275 billion kilowatt-hours (kWh) of electricity. By 2017, that was just a bit higher at 300 billion kWh. But modern renewables like wind and solar power soared from nearly nothing in 2000 to 300 billion kWh in 2017.
Still, that is less than half the gains made by natural gas.
From 2000 to 2017, power generated by coal fell by 700 billion kWh. Meanwhile, at the same time natural gas generation increased by 700 billion kWh.
Dialing Down CO2 Emissions
The impact of the huge drop in coal can be clearly seen in the emissions data.
First, let me explain why coal has higher associated carbon dioxide emissions. Fossil fuels contain two different elements that produce energy: carbon and hydrogen.
When carbon burns, it forms carbon dioxide. When hydrogen burns, it forms water vapor. Coal has a much higher concentration of carbon, whereas natural gas has much more hydrogen. Thus, when natural gas is burned, it produces relatively fewer carbon dioxide emissions.
According to the BP Statistical Review of World Energy, the U.S. has reduced carbon dioxide emissions by 639 million metric tons per year since 2000. This leads all countries by far in reducing carbon dioxide emissions. Far behind in second place was the U.K., where emissions dropped by 165 million metric tons per year.
China, by contrast, increased its carbon dioxide emissions by a whopping 6.8 billion metric tons per year, primarily a result of ~170% increases in both oil and coal consumption.
A Blueprint for the World
Those who wish to debate whether natural gas should be a bridge between a coal-fired past and a renewable future are missing the point. It is already serving as that bridge.
Further, the U.S. has set forth a potential path that the rest of the world could follow. Countries that rely on coal consumption for a large share of power production can phase that out in favor of a combination of natural gas and renewables, with an eye toward a future that is primarily renewable. In the interim, carbon dioxide emissions will drop as coal is replaced with cleaner-burning natural gas.
China has started down this path. China’s natural gas consumption has doubled since 2010 as the country seeks to reduce its reliance on coal. This development, along with its investments in renewables, has helped China’s coal consumption decline by 4% since a high in 2013.
The Winners
Who might benefit from such a global transition? Beyond the environmental benefits, the beneficiaries will include natural gas producers, liquefied natural gas (LNG) shippers, and renewable power suppliers.
Given the continued surge of U.S shale gas production, the U.S. is in a good position to help supply LNG to the world. China is already the 3rd largest export market for U.S. LNG, behind Mexico and South Korea. But that momentum could stall given China’s recent announcement that it might impose a 25% tariff on U.S. LNG shipments.
There is tremendous opportunity for the world to adopt the U.S. blueprint for the evolution of the global power sector, given the right government policies. The opportunities for investors are vast as well.
