Winds Are Shifting in U.S. Power Generation Market

Charles Fishman: Coal and natural gas have been fighting for the top spot in the U.S. generation market for the last 20 years. In 2016, gas generation topped coal for the first time. Gas is the new king, with 35% market share. Now the battlefield is shifting, and in the next decade we expect natural gas and renewable energy, particularly solar and wind, to slug it out.

Renewable energy has been growing at extraordinary rates but still has just 10% market share. By 2030, we forecast renewable energy to produce 22% of U.S. electricity generation, surpassing coal, nuclear, and hydro as the second-largest source of power generation in the U.S. We think gas will also be a winner because of its flexibility to support intermittent wind and solar, extending its market share lead to 41% over the next decade.

The U.S. Energy Information Administration and others believe renewable energy growth will level off as wind and solar tax credits ramp down early next decade. We disagree and think renewables will continue to grow at a similar pace. Our bullish outlook is built on the investment utilities are making to meet state renewable portfolio standards and satisfy corporate demand.

We believe integrated utilities with supportive regulatory frameworks should benefit as they retire coal plants and replace these assets with natural gas, renewables, and transmission infrastructure. The largest U.S. utilities--Dominion Energy D, Duke DUK, NextEra Energy NEE, Southern Company SO, and Xcel Energy XEL--are investing billions in narrow- and wide-moat projects that should result in strong earnings and dividend growth over the next decade.