Over 90% of the coal produced in the US is used for electricity generation. The utilities segment is coal’s largest end user. As a result, coal and utility investors should watch for trends in electricity generation.
Electricity storage is expensive. Most electricity is consumed instantaneously. So electricity generation mirrors consumption. The Edison Electric Institute (or EEI) publishes generation data weekly with a lag of one week. The current report is for the week ending February 27.
Electricity production drops
Electricity generation in the US decreased marginally to 85.4 million megawatt hours (or MWh) during the week ended February 27, compared to 86.1 million MWh for the week ended February 20. However, electricity generation was 8.1% higher than the 79.0 million MWh during the corresponding week in 2014. We’ll discuss the divisional breakup 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 up some market share from coal.
Note that weekly generation data is subject to seasonal aberrations. The impact on utilities such as AES (AES) and Southern Company (SO) depends on the regional breakup of electricity generation. We’ll have a look at this breakup in the next part of the series.