By Scott Anderson
April 3, 2017 - Earlier this week the EIA released the December electricity stats for the US and it contained a bombshell. Just a month after the election of Donald Trump as President of the United States coal usage soared 33% pushing coal’s market share in electricity generation to 34% for the month. This allowed coal to leapfrog natural gas’s 28% and take back the monthly market share crown many assumed it would never hold again. So what just happened? Was this a Trump miracle? Al Gore’s worst nightmare? Both? Probably not but what we really want to know is if this is just a one month aberration or if it is a trend destined to continue.
It is no secret that natural gas has been stealing market share from coal in the electricity generation market for the last decade. To understand how and why we need to look back a few years at the size and history of the electricity market.
This chart going back to 1999 was a surprise to me highlighting that the demand for electricity has been pretty much flat for the last 8 years while I would have expected it to have continued growing at least 1-2% or so a year. In any case the total size of the electricity market is around 4 million gigawatts per year and appears to be relatively stable for now, which should simplify our forecasting process. For reference, that’s enough electricity to send Marty and the DeLorean back in time about 3.3 million times, so a lot! All kidding aside, a gigawatt is simply 1 million kilowatt hours (kwh) which is the standard billable unit most consumers are familiar with.
Now that we know the size of the market we are looking at let’s take a look at market share over time plotted with the price of natural gas.
Here we can see that coal started 1999 with 52% of the market share. Over the next 10 years, despite a pretty wild ride for gas, coal only lost 4% of the market share down to 48% by the end of 2008. Contrast that to gas which managed to rise from 15% to 21% despite large increases in price.
From 2008-2016 the chart tells a very different story. The “Great Recession”, followed by the election of Barack Obama and finally a few years later advancements in fracking have completely changed the electric power landscape in just 8 years. There are 3 crashes in the price of natural gas, and each time gas crashes it comes in and takes market share from coal. When the price of gas recovers coal is only able to recover a fraction of the lost market share. As of the end of 2016 natural gas’s market share had climbed from 21% to 34% and coal had fallen from 48% to 30% in just 8 years. These charts show the trailing twelve month average while the first chart showing coal jumping ahead of natural gas above was the monthly. It will take more than one month for coal to steal back the annual title from natural gas, so let’s take a look at what the future might hold.
One of the drawbacks of working with free EIA data is that the data we want isn’t always timely. As I write this near the end of March 2017, we just got the data for December, so there is nearly a 3 month delay in the monthly reporting. Fortunately, while it is eclipsed by the much anticipated weekly oil and gas reports, the EIA actually has a Weekly Coal Update that I recently took the time to dump into Excel and play around with. There is a lot of detail in these weekly reports but the bottom line is that you get an estimate of weekly US production, and if you string enough weeks together, you can see the year over year production.
Let’s take a look at the first week of 2017 for an illustration. The EIA has week 1 of 2017 coal production estimated at 13.8 million tons. Looking back to the first week of 2016, weekly coal production was just 11.5 million tons. So the first week of 2017, coal production was up 20% and 2.3 million tons. That’s a pretty big increase. If we work through the conversion tables we can come up with a rough estimate that 2.3 million tons of additional coal could be used to replace about 30 BCF of natural gas (UNG) a week or 4.3 BCF a day.
My hypothesis is that even though we don’t necessarily have the timely coal, gas, and electricity data we might prefer, we should be able to use the weekly coal production numbers from the EIA to forecast in more or less real time how much coal the industry plans to use for electricity generation in upcoming months and hopefully get some insight into what that means for natural gas. The reasoning is that unlike gas, coal has pretty much one use with 93% of production being used to generate electricity. U tilities that want to burn coal must plan for it in advance with coal mines, and once they commit to it they are unlikely to change much unless there are material changes in the price of natural gas.
To test this hypothesis below we chart year over year weekly variance in coal production from 2014-2017.
Here we can clearly see coal production drop off in early 2015 coinciding with the collapse in market share shown in the earlier chart. Sure enough, we can even pencil out the production using the reverse of the above and come pretty close to the increase in the natural gas power burn, though it isn’t perfect due to changes in inventory, total electric demand, and losses of market share to other sources. Looking at the historicals I think that it is pretty clear that we have a solid relationship between weekly coal production and coal usage.
2017 Coal Production Indicates Big Rebound For Coal
It’s one thing to observe a single month swing in market share as this can be caused by many factors and does not always indicative of a major market shift. However, in addition to the December surprise we now have coal production stats for the first 12 weeks of 2017 totaling 187 million tons compared to 161 million tons in 2016. That’s a 16% increase and we can calculate that those 26 million additional tons of coal will be used to displace as much as 351 BCF of natural gas. Looking back to 2016 we can see that this reversal actually started in late October so this uptick in production is getting close to six months old. The year is young, but if we lower our expectations to just 10% of coal production growth over the rest of 2017 we can calculate that coal alone could displace as much as 1 TCF of natural gas and be back on top as the leader in the trailing twelve month average as early as this summer.
For many years now it has been accepted common knowledge that coal was slipping away, losing market share to natural gas and the renewables and would fade away into the history books over the coming decades. Old coal plants were being shuttered and new ones being cancelled on the drawing board. For 8 years the facts on the ground have supported this consensus. It will take more than 4 months to reverse an 8 year decline but there is now growing evidence that coal is about to come roaring back. Now without a doubt many coal plants have been closed in the last 8 years but that doesn’t mean the industry is tapped out. Looking at the last 12 months comparing the peak month of electricity production to the 12 month average, I calculate that total utilization for the year was at just 75%. This indicates that existing coal plants at present have the capacity to burn a lot more coal than they did in 2016 without building any new plants. December’s 33% gain may not be repeated but an increase in line with the 16% we are seeing in production is certainly possible.
I think we already knew this but ultimately the fate of coal is in the hands of natural gas. As we saw last year, electric utilities are more than happy to help the natural gas industry burn down their inventory gluts every few years as long as the price is right, which generally means well under the actual cost of production. It varies but that number is probably between $2.50-$3.00 an MCF. For now, gas seems solidly over $3.00 on weak production and the ramping up of exports but clearly nothing is certain. I will be revisiting this thesis periodically but for now my projection is that in 2017 natural gas will average over $3.25/MCF and will lose substantial market share to coal in the electric generation market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.