Energy Stocks

Why Investors Should Steer Clear of Coal and Natural Gas

For most of the 20th century, coal generation was the top dog in the U.S. power sector.

But that’s not the case today.

By the end of 2020, coal generation was down to only 19% of the country’s power generation. It’s now fallen below renewables. And the gap between the two is going to widen rapidly over the next few years.

The nation’s quest to switch to green energy is firmly underway. And almost as important as knowing where to invest is knowing which areas to avoid.

On Its Way Out

Over the past several decades, coal’s share of electricity generation has steadily declined.

Emissions from coal-fired power plants are extremely harmful to the environment. They contain pollutants such as carbon dioxide, sulfur dioxide, mercury and nitrogen oxide.

The harmful effects of these toxins became evident in the 1990s. For example, acid rain – containing pollutants from coal plants – has rendered many lakes in the Northeast devoid of life.

These effects prompted increasing environmental regulations on coal plants. Coal plant owners were forced to retrofit pollution controls to existing plants for a pretty penny.

Today, outfitting a large plant with pollution controls can cost more than $1 billion.

There are roughly 240 coal plants left in the country. And more than 100 of them are planning to undergo or have already undergone some form of pollution control. Those expenditures add up to almost $34 billion.

But with the switch to renewable energy moving faster every day, the costs spent on those retrofits risk being stranded. This means that they risk becoming redundant due to advances in energy technology.

There are 22 coal plants that have already spent a collective $3.5 billion on pollution retrofits. But now they’ve been tagged for retirement.

And it looks like the retirement trend is going to continue.

Goodbye, Natural Gas

Coal isn’t the only energy generation process under fire…

Natural gas plants are on the chopping block too.

With coal firmly on the way out, the next-largest polluters are natural gas-fired generating stations.

Natural gas is cleaner than coal. And it emits 50% to 60% less carbon dioxide when burned.

But there is a downside to natural gas that most investors don’t know about…

The process of drilling a natural gas well, extracting the gas and transporting it through pipelines causes methane to leak. Methane is a greenhouse gas that is 34 times stronger than carbon dioxide when it comes to trapping heat.

These emissions range from 1% to 9% over the life of the well, pipes and control valves. And if the leakage is above 3.2%, the natural gas is no better than coal.

Now, let’s look at natural gas-fired power plants. They are very similar to coal plants – except all they burn is natural gas.

Many are designed to run 24/7. However, increased renewable generation forces them to shut down for part of the day.

The constant cycling leads to higher maintenance costs. The increasingly lower cost of renewable power is a problem for utilities with natural gas-fired generating plants.

Cheap power from renewables means some natural gas plants can’t cover their fixed operating costs. The more renewables and storage a utility has on its grid, the less it needs natural gas plants.

Although they will be here longer than coal-fired generators, natural gas-fired power plants are also on the way out. In fact, another $34 billion of new natural gas generating plants under construction could be at risk of becoming stranded assets.

Add that to coal’s stranded assets and U.S. utilities have potentially wasted $68 billion in unneeded fossil fuel plant costs.

Steer Clear

Investors should steer clear of utilities that generate much of their power from coal and natural gas.

Shareholders certainly won’t be rewarded when utilities have to write off stranded assets. And you don’t want to be one of them.

The country is moving toward renewable energy. And you should steer the energy stocks in your portfolio in that direction too.

Perhaps your preference is to invest in renewable energy companies themselves. But if you want to invest in utilities, make sure they’re moving in the direction of renewable generation.

Good investing,

Dave

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