Over 90% of the coal produced in the US is used for electricity generation. The utilities sector is coal’s largest end user. As a result, coal and utility investors should watch for a trend in electricity generation.
Electricity storage is expensive. Most of the produced electricity is consumed instantaneously. So, electricity generation mirrors consumption. The Edison Electric Institute (or EEI) publishes the generation data on a weekly basis with a lag of one week. The current report is for the week ending March 13.
Electricity generation falls sharply
Electricity generation in the US decreased to 71.0 million megawatt-hours (or MWh) during the week ended March 13 compared to 80.8 million MWh for the week ended March 6. However, the electricity generation was almost equal to 71.4 million MWh during the same week in 2014. We’ll discuss the divisional breakup more in the next part of this series.
What does this mean?
Thermal coal is almost entirely used for electricity generation. As a result, a decrease in electricity generation is negative for coal producers (KOL) like Peabody Energy (BTU) and Alpha Natural (ANR)—keeping everything else constant. Moreover, in the current low natural gas price environment, natural gas may snatch market share from coal. Note that the weekly generation data is subject to seasonal aberrations. The impact on utilities (XLU) such as AES (AES) and Southern Company (SO) depends on the regional breakup of electricity generation. We’ll take a look at this in the next part of this series.