US Electricity Generation: A Zero Sum Game

The electricity industry has an uncertain future that belies the historically stable, low beta performance of utilities.  The past was stable in part because growth was strong and reliable....from 334 BKwH  in 1950 to 4,157 BKwH in 2007, with only 2 years of negative growth.

Beginning with the financial crisis in '08, things changed.  As in many sectors, growth turned negative.  Unlike many sectors, it has not recovered.

And through July of 2013 there doesn't appear to be any change in the red slope for this year.  This has important implications for the industry, and for the feed stock components of power generation where smaller revolutions are taking place already.

So five significant variables for the industry:

• Uncertain growth in aggregate power demand
• Regulatory opposition to fossil fuels (chiefly coal)
• Subsidy and protection for renewables
• Shale gas revolution 
• Everything else (technology risks, ageing grid, conservation, macro, nuclear, ham sandwiches)

Virtually all of these issues are urgent, and generating immediate impacts on the energy industry.  And when the pie is not growing, as is the case for now, any growth in market share for one component is theft from another.  Up to now, the threat posed by renewables to fossil fuels was negligible because power demand was growing and renewable market share was meaninglessly small.  And the regulatory/environmental opposition to coal fired power was strong but primarily preventing expansions.  

Now, coal is being crushed by the combination of cheap shale gas, relentless regulation, a decline in exports, and the presence, at last, of renewables on the radar.  Coal's worst nightmare is wind.  And wind is where the growth is in renewables.  

Fossil fuels are losing market share:

And coal is quickly ceding its share of the fossil fuel component:

In 2014, a significant number of coal fired generating stations will be retired, and the price of natural gas is low enough to encourage coal to gas switching in some areas of the country.  This phenomenon is very price sensitive, and very self-correcting, so it cannot be reliably predicted very far into the future when prices are near the boundary.