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The "Golden Age of Gas" Is Over

The "Golden Age of Gas" Is Over

 
Dow Jones Institutional News; New York [New York]
09 Nov 2017.
By Jack Hough
 
The golden age of natural gas is ending, and coal isn't headed for a comeback. Both will quickly cede market share in U.S. power generation to wind and solar, which will be cheaper than fossil fuels by the end of the decade, especially as technology for electricity storage improves. That's bad news for General Electric (ticker: GE), which has plenty of exposure to gas turbines. It's good for Honeywell (HON), Hubbell (HUBB) and Wesco (WCC), which supply equipment for distributing renewable energy and modernizing the electricity grid.
 
The prediction comes from J.P. Morgan's Stephen Tusa, who shares his bearish view of GE in this week's Barron's magazine. Tusa recently spent two days in meetings with 14 utilities at a conference hosted by Edison Electric Institute, a trade group. Among his takeaways: Mitsubishi Heavy Industries (7011.Japan) seems to be gaining traction relative to GE in turbines. But renewables are clearly where the growth is.
 
Consider the outlook for Minneapolis-based Xcel Energy (XEL). In 2005, it generated 56% of its power from coal, 23% from gas and 3% from renewables. By last year, coal had dropped to 37%, gas had grown to 25% and renewables were up to 20%. That period marked the "golden age of gas'" according to Tusa. Political rhetoric aside, coal's decline has had less to do with government regulation than with new drilling technology that has unlocked vast supplies of gas from U.S. shale. A decade from now, however, gas could be relegated to serving as a fill-in power source, like coal. Xcel, for example, plans by 2027 to generate 20% of power from coal, just 17% from gas and 47% from renewables. Many other power companies make similar predictions.
 
One reason is that renewable power costs have fallen 70% since 2010 and could drop another 20% to 25% by 2020, becoming competitive with fossil fuels. Another is that power companies are quickly investing in electricity storage. AES (AES), based in Arlington, Va., has a joint venture with Siemens (SIE.Germany) to take storage capacity to 30 gigawatts in five years from just three today. In other words, batteries have already spread from powering smartphones to weed whackers to, increasingly, electric cars. Homes will be next, and that's a long-term concern for gas investors.
 
Email: editors@barrons.com
 

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