Credit: Shutterstock photoChicago, IL - July 17, 2015 - Today, Zacks Equity Research discusses the Coal (Part 3), including Arch Coal Inc. ( ACI ), NextEra Energy Inc. ( NEE ), Xcel Energy Inc. ( XEL ) and American Electric Power Co., Inc. ( AEP ).
Industry: Coal (Part 3)
Link: http://www.zacks.com/commentary/51102/how-bad-could-it-get-for-coal-stocks
The EIA's recent release indicates that lower domestic demand and shipments will lead to a decline of 75 million short tons (MMst) of coal production in 2015. The release also projects that coal production will decline in all coal-producing regions while 2016 production will remain near 2015 levels.
Arch Coal Inc. ( ACI ) echoes a similar sentiment. The company believes that natural gas prices and the likely implementation of new environmental regulations this year could actually lower domestic demand for coal by 80 million tons in 2015.
Per EIA, coal consumption for generating electricity will decline by 7% in 2015 from 2014 levels. The average cost of coal for electricity generation fell from $2.39 per one million British Thermal Unit (MMBtu) in 2011 to $2.36/MMBtu in 2014. The EIA expects the delivered coal price to average $2.29/MMBtu in 2015 and $2.30/MMBtu in 2016.
Here are some of the severe headwinds that the coal industry is up against -
Environmental Legislations: Coal has been losing its importance as a fuel source over the last few years, particularly in the U.S., vis-à-vis other sources that are much less harmful to the environment. Concerns over the emission of greenhouse gases and global climate change have resulted in the formulation of new legislations and policies which emphasize the use of environment friendly fuel sources, particularly in the power sector.
This has considerably slowed the expansion of coal-fired capacity in the power sector, with utility companies now building new natural gas-fired plants and resorting to alternative sources of energy generation like wind, solar and hydro power.
Florida Power & Light Company ("FPL"), a unit of NextEra Energy Inc. ( NEE ), filed a petition with the Florida Public Service Commission requesting for the approval to acquire Cedar Bay Generating Plant in Jacksonville. FPL had a long-term power purchase agreement with the owner of this 250 MW coal-based facility. The objective of the request is to acquire the plant and gradually phase it out of operations.
Xcel Energy Inc. ( XEL ) has already reduced carbon dioxide emissions during power generation by around 22% since 2005 and American Electric Power Co., Inc. ( AEP ) has eliminated over 5,500 megawatt (MW) of coal-fired capacity.
Natural Gas Substituting Coal: A major substitute for coal in energy generation is another fossil fuel -- natural gas. Coal is being dumped in favor of natural gas, which due to extensive exploration and production and a shale gas boom in onshore U.S., is seeing significantly lower prices than in the past.
Natural gas is usually an attractive choice for new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. This trend is encouraging power generators to not only convert their existing plants to gas-fired ones but to build new units.
Electric generation through gas-fired plants is likely to become more competitive over the coming years given its abundant domestic availability and the regulatory threat hanging over the coal mining industry. A recent EIA report projects a 7% decline in coal consumption in the electric power sector in 2015. Lower natural gas prices are the primary factor behind coal's growing unpopularity.
Competition from Alternative Energy Sources: Apart from natural gas, the coal industry has been losing a major share of its electric generation demand to renewable sources of energy. The EIA expects renewables used in the electric power sector to grow by 1.8% in 2015.
Production of power from renewable sources is supported by most of the U.S. states. At present there is no national consensus regarding the percentage of energy to be generated from renewable sources.
Even in the absence of a clear national policy on carbon emission, there is no doubt that state legislators are laying more stress on renewables. At present, 30 U.S. states and the state of Columbia have enforceable renewable portfolio standards or other renewable generation policies. These policies were designed to spread awareness and encourage the power generators to produce more from renewable sources.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
ARCH COAL INC (ACI): Free Stock Analysis Report
NEXTERA ENERGY (NEE): Free Stock Analysis Report
XCEL ENERGY INC (XEL): Free Stock Analysis Report
AMER ELEC PWR (AEP): Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
