Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
— Sir Winston Churchill, Nov. 10, 1942

Winston Churchill uttered this now famous phrase during a speech after Great Britain began to score some victories in World War II. Given Germany’s dominance at that time, Churchill was understandably attempting to manage expectations. He knew that Britain still had a hard fight ahead, and victory was still years away.

Long before World War II both Germany and the U.K. industrialized using coal, and to this day coal remains a major component of their power mix. Despite today’s headline-grabbing news about the rapid growth of renewable power capacity in Germany, according to the 2014 BP Statistical Review it is coal that remains the country’s #1 source of electrical power (for now). In the U.K. coal is in second place, behind natural gas.

However, in both countries coal is losing its long-held grip as the dominant energy source. Over the past two decades, coal consumption in Germany has fallen 17%, even as overall German electricity generation grew 20%. In the U.K. coal consumption fell 31% despite a 10% rise in electricity generation. This trend was the same for most developed countries. In the U.S., electricity generation rose 27% over the past two decades, despite a 9% decrease in coal consumption.   

Across the developed world, it looks like the beginning of the end of coal is well underway.

Developing countries, however, have been a different story. The two largest, China and India, are indicative of coal consumption patterns in the developing world. Since 1993, coal consumption in China has increased 235%. In fact, China’s coal consumption increase was equivalent to 81% of the global increase over that time span. India uses far less coal than China, but its coal consumption grew 188% over the past two decades.

Prior to 2014, Chinese coal consumption had increased 15 years in a row. As the world’s #1 producer and consumer of coal, China has been under global political pressure to reduce greenhouse gas emissions arising from coal consumption.

China has been adding more renewable power capacity in recent years than any other country, and is aiming to more than triple its solar power capacity to 100 gigawatts by 2020. While China used 5.9% more crude oil and 8.6% more natural gas last year than in 2013, according to China’s National Bureau of Statistics the country’s coal consumption fell 2.9% — the first decrease in China’s coal consumption this decade.

It’s far too early to say whether this marks the end of the beginning of China’s coal consumption, but in the U.S. the phaseout of coal is accelerating. On April 16 the Mercury and Air Toxics Standard (MATS) takes effect. This act requires oil- and coal-fired power plants to limit their emissions of toxic air pollutants like mercury and arsenic. The new standards require all plants to achieve emission reductions matching the average of the top 12% best-controlled sources.

Rather than spending the money to meet these new standards, a number of older coal-fired power plants are shutting down. A recent white paper from Bloomberg New Energy Finance  forecasts that 23 gigawatts (GW) of power — accounting for about 7% of U.S. electricity generation — will be retired this year. Another 30 GW is forecast to be idled by 2020.

The loss of capacity will be partially made up by increasing the output from the remaining coal-fired power plants, but the lion’s share of coal’s loss will be replaced with natural gas. Renewables will benefit as well, but the loss of that much firm power will mostly require firm power like natural gas (or nuclear) to replace it.

While natural gas will contribute the most absolute power generation, the growth rate for renewable capacity additions will continue to be much higher than that for natural gas-fired power for the foreseeable future. The aforementioned BNEF white paper forecasts that 18.3 GW of renewable power capacity will be added in 2015 in the U.S.; 9.1 GW from solar and 8.9 GW from wind.

In addition to the expected shutdowns of coal-fired power plants, the primary driver for renewable power projects is the potential loss of federal tax incentives at the end of 2016. I think it’s likely that these tax credits will be extended in some form as has been the case in the past, but project developers are taking no chances and are rushing to get their plants built ahead of the deadline.

The clear loser will be the long-suffering U.S. coal industry, which has experienced bankruptcies, mergers and a huge loss of market capitalization over the past few years. We have been fortunate to avoid the cave-in at The Energy Strategist while riding a couple of impressive solar outperformers. Join us as we continue to exploit the energy industry’s rapidly evolving opportunities.   

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Tankers Gaining Steam    

Frontline (NYSE: FRO) shares are rallying for the third trading session in a row Tuesday as traders anticipate the repayment on the tanker operator’s convertible debt offering coming due today. The company said back in February that it’s confident it will have the cash to repay the remaining balance of $93 million. But it won’t hurt a bit to have that overhang out of the way for good, at a time when oil tanker rates are moving aggressively higher.

In the fourth quarter of 2014 those rates shot up after a prolonged industry slump, averaging roughly double Frontline’s operating costs. But share issuances required to reduce the convertible debt produced a net loss that may have muddied the water.

That non-cash drag should now go away, while earnings will get another boost from healthy first-quarter rates that have pushed significantly higher so far in April.

What seems to have happened is that potential customers anticipating typical springtime discounts realized all at once that they won’t be on offer, even as several temporary factors boosted demand.

The longer-term view of industry charter rates shows how much further they might rally if the recovery holds, and also explains why stock market traders have so far remained skeptical that it would.

But even a terrible business gets to enjoy a cyclical upswing once in a blue moon, and for the long-suffering tanker owners that blue moon seems to be in hand, as low oil prices perk shipping demand even as fleet capacity remains constrained after a lengthy slump.

In the medium term, if the lifting of nuclear sanctions on Iran increases that country’s oil exports, tanker rates should benefit. They could also be helped by the long-expected and likely imminent near-term peak in U.S. crude production, since the U.S. remains a major crude importer.

Buy FRO below $3 and our other oil tanker bet, Teekay Tankers (NYSE: TNK) below $7.50.  The latter is already up 20% since we recommended it on Feb. 2 and, as with all Aggressive Portfolio picks,  remains a risky and highly speculative investment.       

                                                                                                             — Igor Greenwald