More than 90% of the coal produced in the United States is used for electricity generation. The utilities segment 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. Electricity generation thus mirrors consumption. 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 20.
Electricity production falls marginally
Electricity production in the United States decreased marginally to 70.5 million megawatt hours (or MWh) during the week ending March 20. This compared to 71.0 million MWh for the March 13 week. However, electricity generation was lower than the 72.7 million MWh during the same week in 2014. We’ll take a look at divisional breakup in the next part of the 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) such as Peabody Energy (BTU) and Alpha Natural Resources (ANR), keeping everything else constant.
In the current low natural gas price environment, natural gas may snap market share from coal. Note that the weekly generation data are subject to seasonal aberrations. The impact on utilities such as AES Corp (AES) and Southern Company (SO) depends on the regional breakup of electricity generation. We’ll take a look at that in the next part.