Morningstar Magazine - June/July 2017 - 76

18
12
16
10
814

800 Strategies
400
200
600
2009

2012

2015

2018

2021

2024

EXHIBIT 2

Shift400
From Coal We think natural gas could supply as much as 44% of all U.S.
generation by 2024, and coal just 20%.

10
8

200
2%
2009

2012

2015
6%

20%

50%

2021

12%

34%
9%
30%

2016

12%

44%
20%

2024E

20%

50%

18%

Note: Assumes 1.1% generation CAGR 2017-24.
1%
Sources:19%
Morningstar, U.S. Energy Information Administration, Nuclear Energy Institute.

44%

34%

2005 Cost of Electricity
Levelized

2016

EXHIBIT 3

Coal
Oil
Natural Gas
Nuclear
Hydro
Renewables
Coal
Oil
Natural Gas
Nuclear
Hydro
Renewables

20%

2024

18%

2%
7%

19%
2005

30%

19%

2018

2024E

Coal at a Cost Disadvantage Even without tax credits, wind and solar energy is
cheaper than coal.
124.48

37.41

13.23
Wind
with PTC

Natural Gas Solar
CCGT
with ITC
37.41

13.23

41.19

Wind
excl. PTC
50.86

58.84

65.87
124.48

Solar
excl. ITC
58.84

Coal
65.87

120
MWh
80
160
$

Levelized Cost of Electricity

50.86

MWh
160
$

Coal with
carbon capture

40
120
0
80
40
0

Wind
with PTC

Natural Gas Solar
CCGT
with ITC

Wind
excl. PTC

Solar
excl. ITC

Coal

Coal with
carbon capture

Source: Morningstar. Data as of 12/16/2016.

We also are seeing mainstream companies-not
just high-tech or those catering to millennials-
working to reduce their carbon footprint by buying
renewable energy. Corporate purchases have
surged, particularly in 2015 as developers rushed
to find energy buyers ahead of the scheduled
production tax credit expiration. With the tax credit
now extended, companies have restarted
signing contracts at a faster rate than before.
Renewable Choice Energy, a company that assists
corporate buyers, expects a flood of deals in 2017.
Forecast 2: Gas Trumps Coal
The media have fixated on Trump's anti-regulation,

Morningstar June/July 2017

pro-coal rhetoric, but we think this is a
distraction for utilities investors. Free market
economics will determine winners and losers with
Trump's all-of-the-above energy policy,
and that means natural gas will continue to steal
market share from coal at least in the short
run. We also think investors should ignore
the headlines about Trump's controversial pick to
lead the Environmental Protection Agency,
Scott Pruitt. Instead, investors should be watching
developments at the Federal Energy Regulatory
Commission and the Department of Energy under
Rick Perry to understand the outlook
for utilities.

As recently as 10 years ago, coal accounted
for half of U.S. electricity generation. In 2016, coal
plants produced only 30% of electricity,
trailing natural gas (34%) for the first time. We
think gas could supply as much as 44% of all
U.S. generation and coal just 20% by 2024 based
on our forecasts (EXHIB IT 2 ).
The key factor in our forecast is our expectation
that the United States will add no new coal
generation capacity in at least the next eight years,
for three reasons. First, we think the Trump
administration will keep existing non-carbonemissions regulations related to mercury, sulfur
dioxide, and nitrous oxide. Second, we think
the Trump administration will keep the EPA's New
Source Performance Standards, which limit
carbon emissions for new coal plants to levels that
current coal generation technology cannot meet
without uneconomic carbon-capture technology.
Third, building new coal generation capacity based
on current construction and operating costs
is far less economic than new natural gas
generation or renewable energy in many places.
Our levelized cost of electricity, or LCOE, analysis
shows why coal is at an economic disadvantage to
combined-cycle gas turbines, wind, and solar
(EXHIB IT 3 ). For wind and solar generation,
the exponential drop in capital costs, rising
capacity factors, and tax credits have brought their
LCOE well below that of coal generation. Even
absent the tax credits, wind generation is
cost-competitive, a testament to the improvements
in technology that have driven down costs and
increased turbine efficiency. Solar still needs tax
incentives to be competitive with wind and
natural gas, but solar tax credits won't be fully
phased out until 2023, several years after
the phaseout of wind tax credits. Carbon-capture
technology has proved cost-prohibitive based
on the experience of a few utilities that have taken
on projects.
Because we don't expect a material change in coal
generation capacity, natural gas generation
and renewable energy are the technologies that
will be required to meet our demand growth
outlook. The Nuclear Energy Institute is tracking
126 GW of new gas turbine under construction,
in documentation phase, or proposed through

Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017