Natural gas prices have been on the rise in 2013. One of the major contributing factors for the rise, and one that will push gas prices even higher in the years ahead, has been singled out by Money Morning Global Energy Strategist, Dr. Kent Moors a number of times...
That factor is the switch by electric power companies from coal-fired electric generation to natural gas-fired generation. More than 9,000 megawatts of coal-fired generation were retired in 2012 alone.
The switchover is occurring because of two main reasons.
The first reason is how low natural gas prices are - even though the switch is causing a price climb.
The second is that burning natural gas is about half as polluting as burning coal.
This is a key point considering the upcoming imposition in 2016 by the Environmental Protection Agency (EPA) of non-carbon emission standards covering pollutants such as mercury, sulfurous oxide and nitrous oxide.
The change in the mix of fuels used by electric utilities can be illustrated by the example of the Southern Company (NYSE: SO), which provides power in the Southeastern United States.
Back in 2008, Southern produced 70% of its electricity from coal. Last year, that figure dropped to about half that amount.
In 2007, natural gas accounted for between 10-12% of Southern's energy. The company expects that number to reach 47% in the future.
Natural Gas Prices Fuel Coal RetirementsRight now coal power plants account for about 318 gigawatts (1 gigawatt=1000 megawatts) of electric generation, which is equal to about 30% of the U.S. total of 1,051 gigawatts.
Such power plants provided about 37% of the country's power supply last year, down from 42% in 2011. Coal generated more than half the nation's power as recently as 2003.
But that coal power generation number is likely to drop drastically in the years ahead.
U.S. utilities have either already retired or have plans to shut down or convert more than 50,000 megawatts of coal-fired generating capacity over the next several years.
Reuters quotes various industry estimates as eventually expecting shutdowns of between 60,000 and 100,000 megawatts of coal-fired generating capacity.
Moors says that at least 90,000 megawatts of coal-generated power plants will be shut down by 2020, with an additional 20,000-30,000 megawatts possibly shutting down specifically to meet the EPA regulations.
Standard & Poor's stated that approximately two-thirds of the U.S. coal-powered fleet is more than 40 years old and must either be retired or undergo costly retrofitting.
An article in the Washington Post stated that as much as 65% of the U.S. fleet of coal power plants could be under threat in the years ahead from the EPA pollution standards and cheap natural gas. The Post story cited a study by three researchers at Duke's Nicholas School of the Environment, which analyzed operating costs at various power plants around the country.
The study found that, thanks to low natural gas prices, 9% of the nation's fleet of coal-fired power plants has already become uneconomical to run. These plants are already on the retirement list.
But the real kicker is the effect that the 2016 EPA regulations will have on the power industry...
The researchers from Duke discovered that another 56% of U.S. coal power plants (even many younger ones) may become uneconomical to run, even if the ratio of coal to natural gas prices stays steady. All of this again will be thanks to the EPA regulations.
Investment Implications of Coal-to-Natural-Gas SwitchAll of this, while bad news for the coal industry, is more good news for the natural gas industry.
Moors estimates that for ten gigawatt of electric power generation transferred from coal to natural gas, between 1 and 1.2 billion cubic feet of gas will be required daily.
He goes on to say that if even half of the switchover he anticipates occurs, it means that three times the volume of natural gas currently in storage will be used up.
By the way, natural gas currently accounts for roughly 30% of power generation fuel...
This all points to one thing. . .higher prices for natural gas.
Investors can play any upward move in natural gas prices through exchange-traded funds.
One such fund (and the most traded) is the United States Natural Gas Fund LP (NYSEArca: UNG). This limited partnership invests in natural gas futures traded on the NYMEX and ICE. It currently has July 2013 natural gas futures contracts in its portfolio.
Investors can also follow the best ways to play higher natural gas prices with Moors' Energy Advantageinvestment service. Moors currently recommends a number of energy companies and has delivered 47 winners - including many double- and triple-digit gainers - for his subscribers in the past two years.
Just go here to learn more about Energy Advantage before you miss any more big moves in oil or natural gas prices and their related investments.
Related Articles:
- Money Morning:
Five Reasons Why Natural Gas Prices Will Continue to Rise - Reuters:
Factbox: US Coal-Fired Power Plants Scheduled to Shut - Forbes:
Coal to Gas Moves Are Generating Economic Waves - Washington Post:
Study: The Coal Industry Is in Far More Trouble Than Anyone Realizes - Financial Times:
US Example: Gas Replaces Coal as the Favored Fuel
