Coal, Trump, And Renewables

| About: VanEck Vectors (KOL)
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Summary

Can soon-to-be president Trump stabilize or reverse coal’s decline?

With incredibly cheap and abundant natural gas, does it matter what Trump does?

Will renewables, the new kids on the block, be vanquished?

The climate change controversy.

Investment ramifications (proxy ETFs to watch).

Donald Trump, the United States next president, wants to bring coal back. His stance undoubtedly contributed to his huge election wins in the coal producing states of Wyoming (70% of the vote), West Virginia (69% of the vote), and Kentucky (63% of the vote).

Things have been rough for coal in recent years. Just this past year, Peabody Energy, Arch Coal, Alpha Natural Resources, Patriot Coal, and others have declared bankruptcy.

In 2015, 94 US coal-fired plants closed and 41 are scheduled to close in 2016. It's not just the U.S. Worldwide, two-thirds of the coal plants proposed in 2010 have now been cancelled. Even China has slowed its coal-fired plant growth.

At one time coal generated some 55% of U.S. electricity. Today it still accounts for 33%, but the trend is down.

Yet the price of thermal coal, used in generating electricity, has risen 50% this year. (The price of coking coal, used in the steel industry, is up even more.) Will Trump, as president, keep this trend going?

Can soon-to-be president Trump stabilize or reverse coal's decline?

In a recent address, soon-to-be president Trump pledged, starting on day one, to "cancel job-killing restrictions on the production of American energy, including shale energy and clean coal, creating many millions of high-paying jobs." What he meant by "clean coal" is not clear.

One of Trump's first targets may be the Obama EPA's Clean Power Plan (CPP). The controversial CPP is framed to reduce global warming by further restricting CO2 emissions and is currently tied up in the courts. Even if the CPP is blocked there is a plethora of pre-existing regulations governing coal-fired plant emissions (CO2, sulfur, nitrogen, mercury, particulates), coal ash disposal, effluents (clean streams and lakes), abandoned coal mines, and more.

Congress, the courts, and public opinion (remember Trump lost the popular vote) will limit changes. Even Trump now admits there may be some connectivity between humans and climate change. The bottom line: We will likely see an easing, but not widespread elimination, of coal environmental restrictions.

With incredibly cheap and abundant natural gas does it matter what Trump does?

But it's not just environmental restrictions beleaguering coal. Natural gas is cheap and abundant and highly efficient gas powered combined-cycle plants are slowly - decommissioning and building new power plants can take years - replacing coal steam generators, both in the U.S. and abroad.

Today, coal and natural gas are running neck and neck - each generates approximately ⅓ of U.S. electricity. But, as noted above, the use of coal to generate electricity is in decline and as long as natural gas prices remain below low there is little likelihood of a change in thermal coal's fortunes - no matter what Trump does.

Natural gas, however, comes with its own problems. Utilities find it convenient to store gas near the power plants which burn it. Often, this means old, depleted oil fields. Last year in California one of these fields began to leak methane. (Natural gas is methane.)

Before the leak was controlled over 100,000 tons of methane (a potent greenhouse gas) was released into the atmosphere. Many nearby residents were sickened and thousands had to leave their homes.

Will renewables, the new kids on the block, be vanquished?

Now, though, there are new kids on the block - renewables. In the last few years the use of solar and wind to generate electricity has surged - often they are now the low-cost choice. In 2015 renewables accounted for two-thirds of all new U.S. generating capacity with wind and solar leading the way. (Wind is already generating almost 5% of U.S. electricity.) A recent article on Bloomberg had an article claiming fossil fuels have now lost the race against renewables.

If Trump succeeds in getting renewable subsidies removed (he mentioned it in his campaign) we may soon find ourselves in a situation where unsubsidized solar and wind are less costly than subsidized fossil fuels.

Intuitively it makes sense. Why use large centralized power grids with their massive power plants, hundreds of miles long high-voltage lines, transformers, and utility poles to say... run your electric toothbrush, when the sunshine on your roof can do it?

Energy storage (for when the sun doesn't shine or the wind doesn't blow) is often cited as a major limitation for renewables. But storage technology is rapidly improving. Tesla Motors (NASDAQ:TSLA) is in the forefront. The company introduced its original Power Pack battery in 2015 and now, only a year later, their power pack 2 has twice the original one's energy density. (Please note I'm discussing Tesla's technology here not its viability as a company.)

EV 2017 models (Tesla Model 3, Chevy Bolt, etc.) will sport ranges exceeding 200 miles. Only a few short years ago an EV range of 50 miles was tops. One can only imagine what batteries will be able to do in 3-5 years.

Renewables, though few in the fossil fuel industry will admit it, appear to be in the beginning stages of obsoleting much of the huge fossil fuel energy infrastructure which has been built up across the world over the last 100 years.

Efficient use of electricity is also steadily improving. LEDs reduce lighting's power requirements by 90%. Digital TVs now use only a fraction of what TVs used just a few short years ago. Smart phone apps control appliances. I can now turn off/down appliances from anywhere, etc.

The bottom line? We are in the early innings of a huge transformation in how we both generate and use electricity.

The climate change controversy

Many now believe that the burning of fossil fuels has caused the large increase in CO2, a greenhouse gas, seen in the atmosphere since the industrial revolution. This in turn warms the globe as can be evidenced by shrinking ice caps and glaciers, a rising sea level, and the recent string of "warmest ever" months.

Climate change deniers argue that the climate has always changed. (e.g., A million years ago the world was warmer than today and most of Florida was underwater.) They claim human effects are negligible, i.e. the burning fossil fuels is insignificant in the grand scheme of things and that climatic cycles and volcanic releases of CO2 are natural and bigger factors.

Who is right? Well, manmade or natural, CO2 levels are now the highest in over 600 thousand years and they are still going up very fast. So, it's a fait accompli and no matter what Trump does or doesn't do we will all face the consequences - whatever they may be.

Investment ramifications and proxy ETFs to watch

Regarding coal: Prices did rise significantly in 2016, but this was likely a dead-cat bounce off the extreme price fall of 2010 to 2015. While Trump's victory added fuel to the recent upswing I feel coal prices will never match their 2007 peaks as the burning of coal to generate electricity continues to fall.

Watch the proxy VanEck Vectors Coal ETF (NYSEARCA:KOL). KOL has holdings in 100 global coal companies and with coal still a major player well into the next decade or more, coal will continue to be in strong demand. Trump's trade policies will likely boost the outlook for U.S. producers.

As to renewables, especially wind and solar, markets run on emotions and, like coal in 2015, many renewable equities are now near multi-year lows. Also, like coal (only in reverse) Trump's pronouncements has driven negativism to an extreme. Unlike coal, however, renewables have a promising future.

Watch the proxy ETF iShares Global Clean Energy (NASDAQ:ICLN). ICLN holds a diverse array (29 holdings) of wind, solar, and other renewable companies. Remember though, renewables require less capital and infrastructure so market caps in this sector will never match that of the fossil fuel sector they replace.

In summary: Yes, Trump will have short term impacts on the energy markets. But the Trump effect will be like a passing cloud over a solar panel and long term trends will soon reassert themselves.

Disclaimer: This article is for informational purposes only and should not be taken as investment recommendations. Investing in stocks is risky and investors should use all due diligence and consult a financial advisor before investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.