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Will Natural Gas Lead US Power Sector's CO2 Emission Reduction?

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The U.S. electric power sector has been a forerunner in promoting clean energy worldwide, with increased usage of natural gas in electricity generation over the past 15 years, apart from renewables, playing the role of a major catalyst. Per the  recent data cited by the U.S. Energy Information Administration (EIA), a shift from coal to natural gas had a larger effect on reductions in electric power sector CO2 emissions compared to that of renewables.

Empirically, approximately 65% of the 819 million metric ton decline recorded in CO2 emissions from 2005 to 2019 is attributable to the shift from coal-fired to natural gas-fired electricity generation, while 30% is attributable to the increase in renewable generation.      

Driving Factor

Declining price must have been the primary growth driver of natural gas adoption for U.S. electricity generation in the recent past. Notably, in 2019, natural gas spot prices at the national benchmark Henry Hub averaged $2.57 per million British thermal units (MMBtu), thereby marking the lowest annual average price since 2016. Such lower prices caused higher consumption of natural gas, particularly in electricity generation.

Will This Trend Continue?

If we take a look at the latest natural gas spot price movement, a reverse trend can be observed. In May 2021, the natural gas spot price at Henry Hub averaged $2.91/ MMBtu, up from the April average of $2.66/MMBtu. EIA expects the Henry Hub spot price to average $3.07/MMBtu in 2021, reflecting a rise from the 2020 average of $2.03/MMBtu.

Considering such higher expected natural gas prices, EIA forecasts in its latest short-term energy outlook that the share of electric power generation produced by natural gas in the United States will average 36% in 2021 and 35% in 2022, down from 39% in 2020.

Who Will Benefit?

Considering the aforementioned forecasts, it is highly unlikely for natural gas to persistently lead the transition of the power sector toward carbon neutrality in the near future. Obviously, renewables are next in line to carry on the baton.

With new additions of solar and wind generating capacity in recent times, EIA projects the renewables share of U.S. generation to rise from 20% in 2020 to 21% in 2021 and to 23% in 2022.

Stocks to Watch

With renewables in the current spotlight, electric utilities are rapidly expanding their renewable generation portfolio. We have chosen the following stocks that should find a place in prudent investors’ watchlist. These companies carry a Zacks Rank #3 (Hold) and boast strong financial metrics. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CMS Energy CMS: It aims to spend $2.4 billion in renewables, which includes investments in wind, solar, and hydroelectric generation resources during the 2021-2025 period. The company’s Consumers subsidiary expects to achieve net-zero carbon emissions by 2040 and eliminate the use of coal to generate electricity during this time frame. CMS Energy boasts a four-quarter earnings surprise average of 6.84% and holds a long-term earnings growth rate of 6.8%.

Duke Energy DUK: It aims to reach its target of net-zero carbon emissions from electric generation by 2050 and is aggressively investing in solar and wind energy. In Florida, the company is investing nearly $1 billion in solar projects — bringing 700 MW of solar online through 2022 — and has received approval for its $1 billion Clean Energy Connection shared solar program, which will add another 750 MWs of solar by the end of 2024. Duke Energy boasts a four-quarter earnings surprise average of 2.73% and holds a long-term earnings growth rate of 5.2%.

DTE Energy DTE: It remains committed to reduce carbon emissions of its electric utility operations by 100% by 2050. By 2022, DTE Energy’s wind and solar energy portfolio would generate enough clean energy to power 900,000 homes. Duke Energy boasts a four-quarter earnings surprise average of 16.91% and holds a long-term earnings growth rate of 5.5%.

American Electric Power AEP: It long-term goal is net-zero CO2 emissions from its generating facilities by 2050. As of Mar 31, 2021, the company had approximately 1,549 MWs of contracted renewable generation projects in service. American Electric boasts a four-quarter earnings surprise average of 1.55% and holds a long-term earnings growth rate of 5.9%.

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Duke Energy Corporation (DUK) : Free Stock Analysis Report
DTE Energy Company (DTE) : Free Stock Analysis Report
American Electric Power Company, Inc. (AEP) : Free Stock Analysis Report
CMS Energy Corporation (CMS) : Free Stock Analysis Report
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