The Road To New England ... And The Southwest -- October 29, 2014

Don sent me the link to this Bloomberg story:

U.S. electricity markets face years of higher prices as clean-air regulations shut more coal-fired power plants than earlier forecast, cutting supply and forcing producers to rely more on natural gas.

Standard & Poor’s estimates that 40 to 75 gigawatts (75,000 megawatts) of coal units may be shut by 2020, compared with announced permanent shutdowns of 27 gigawatts. About 18 percent of the closures expected through the end of next year will be replaced by natural gas.

The loss of the cheaper coal units will boost power prices by as much as 25 percent on grids that serve about a third of the nation’s population, according to the Brattle Group, a Cambridge, Massachusetts-based consulting company. The biggest impact may be in the Midwest and Northeast, where demand for gas for heating jumps during the cold-weather months.

“We are really in for a wild ride for five to six years because of the amount of coal shutting down in such a short amount of time and the transformation toward more gas being used to generate electricity,” Philip Moeller, a member of the Federal Energy Regulatory Commission in Washington, said in an Oct. 23 interview.

“Prices will definitely rise. The question is how much.”

Midcontinent Independent System Operator Inc., or MISO, which manages the electricity network that runs from Manitoba to Louisiana, expects its power reserves to fall short of targets by about 2,000 megawatts by 2016, with deficits mounting after that.

Even with the shale boom that’s cut gas prices, power generated with the fuel costs $30 to $35 a megawatt-hour, compared with about $25 for coal.  

There is much more at the article; highly recommend reading. There is some editing of the post above. In a long post, there will be factual and typographical errors. If this issue is important to you go to the source. In addition, this is not an investment site. Do not make any investment, financial, or relationship decisions based on what you read here.

Upon reading that Bloomberg article linked above, I replied to Don:

Good morning, I'm back.

Great article on coal and cost.

One certainly gets the feeling that we both lived long enough to experience another tectonic change in the energy story. We both lived through the OPEC embargo and the decades where OPEC pretty much controlled our energy destiny. Peak Oil seemed to be the overriding concern.

Had there been no energy revolution in North America, US consumers may have faced a double whammy: a) OPEC in control of oil prices; and, b) Algore warmists taking away the one resource Americans had in great amounts: coal.

But the North American energy revolution changed everything.

Everything suggests that we are now experiencing a huge transition, actually two huge transitions. The US is transitioning from a dependence on OPEC to independence with regard to oil. The second transition is from coal to natural gas.

The North American/OPEC oil transition, to some extent, transcends politics.

The transition from coal to natural gas is all about politics. This could change with a new president in 2017.

For the academician, this will be very, very interesting to watch as it plays out over the next 20 years, the political war on coal in the US vs the reality of coal/energy on a global scale.

For the investor, huge opportunities.

I think investors might have the best of both worlds. The fact is that coal is not going to go away, and for those with a very long horizon, investing in coal could eventually pay off.

In the short term, investors in natural gas may be sitting in the catbird seat, as they say.

First, politically, in the US, natural gas will take market share from coal. Second, realistically, there is no alternative (anywhere in the world) to coal and natural gas. Nuclear energy is dead, and even if it rose from the dead today, it would take ten years to get new plants on-line.

Renewables (wind and solar) will always have a niche but the numbers will never work for renewables to make much more than a dent in total energy production. Hydro-electric is regional, and I believe hydro-electricity is maxed out anyway.

After reading Unreal City: Las Vegas, Black Mesa, and The Fate of the West, by Judith Nies, c. 2014 , I am convinced the "canary in the coal mine" (pun intended) will be in the southwest, specifically Los Angeles, Las Vegas, and Phoenix. These cities continue to grow; they are highly dependent on electricity to get water to their cities; and the US is in the process of shutting down the largest coal-generating power plant in the US. It will be interesting to watch. It will take awhile (a decade) to get a better idea how this plays out.

However, we may get an idea much sooner by watching how things play out in another region of the country, New England. The northeast has turned out to natural gas; prices spiked last winter, and it certainly looks to get worse before it gets better.

For investors, it seems pipelines may offer an incredible opportunity. I haven't been posting them but for the past week or so, but the list of companies increasing dividends has been quite long, and most of the companies listed are MLPs in pipelines.

The pipeline companies are in a win-win situation. If the environmentalists shut down increased pipeline capacity, the companies a) raise their rates on transportation (simple supply and demand); and, b) save on CAPEX that they won't be spending on building out huge pipelines. TransCanada has done very well even though they have not been able to complete the Keystone. It will be very interesting to watch New England over the next few years. Likewise, southern California, Las Vegas, and Phoenix are also the places to watch.

More that was not in the note:

It appears that pipeline investing is all about market share. Just like the railroads, pipeline companies have a huge moat protecting them: very unlikely that any huge new pipeline companies will appear overnight -- except as spin-offs from larger companies, but still part of the umbrella. Berkshire Hathaway, ONEOK, Enbridge, KinderMorgan, and ETP all come to mind. It also appears that the regulatory agencies are less averse to mergers and acquisitions in the pipeline sector.