What Trump's energy independence policy means for investors

On March 28, President Donald Trump signed the Energy Independence Policy Executive Order that directed the Environmental Protection Agency to roll back some elements of President Barack Obama's Clean Power Plan. These are Mr. Trump's first steps in reducing environmental regulations in order to stimulate job creation and business investment specifically within the coal industry.

We believe economic rather than regulatory factors are responsible for the decline of the coal industry.

The day after Mr. Trump signed the executive order, Insight executives met with representatives of six large utility companies that provide energy throughout the U.S. All said that the CPP, and/or a reduced regulatory burden, will not affect current plans either to shut down old coal plants or to continue pursuing renewable alternatives. Many are under pressure from investors and clients to introduce clean energy strategies or services, and at present the U.S. remains committed to reducing overall carbon emissions in keeping with the Paris Agreement. It remains unclear whether the administration will go further to rescind or change existing measures and regulations, such as subsidies, carbon emission targets and carbon regulations.

Data from Bloomberg New Energy Finance suggests that new energy generation in the U.S. will be increasingly made up of power from renewable energy sources, which are forecast to account for about half of total power generation by 2040.

Our analysis suggests economic factors rather than regulation are deciding the future for energy, including the scope for employment.

Those factors include:

• The trend in falling energy prices over the last three years, which has made the coal industry less competitive, given inherently higher fixed and variable costs compared to other energy sources.
• The increased competitiveness of natural gas since 2008, given the shale gas revolution in the U.S. Over the last decade competitive drilling in the largest natural gas fields in the U.S., the Marcellus and Haynesville formations in eastern North America and Arkansas, respectively, has resulted in natural gas prices falling 80% since 2008. The use of natural gas over this period also has surged.
• Jobs in coal production have also been under threat from technological progress. These effects have been notable in a number of U.S. regions.

Executives at one utility company with which Insight officials met said running a coal plant takes 300 people, while an equivalent gas plant requires only 30. They noted that producing power from a coal plant has become more expensive than producing the equivalent amount of energy from renewable sources, with costs at a coal plant around $40 per megawatt-hour compared with $20 per MWh from a renewables plant. Executives from a second utility company said even when current green energy subsidies end, the cost to produce energy from renewables will likely still be competitive given expected improvements in technology.

As a result of these factors, we believe the coal industry is facing an inevitable, gradual long-term decline that cannot be rescued by government policy.

Solar and wind power are expected to comprise an ever-greater proportion of renewable energy generation. The U.S. Energy Information Administration projects solar power is expected to be the fastest growing renewable energy source, with total utility-scale capacity expected to increase by 44% to 31 gigawatts at the end of 2018, from year-end 2016. Wind energy capacity at the end of 2016 was 81 GW. The EIA expects capacity additions will bring total wind capacity to 95 GW by the end of 2018. The number of jobs in the renewables sector is also booming.

Renewable energy is also being encouraged by policymakers at the state level, supported in part by federal policy. For example, in Texas, in 2005 the state Legislature required that 5.9 GW (5% of the state's electricity capacity) to come from renewable sources by 2015 and 10 GW by 2025, including 0.5 GW from resources other than wind. Texas surpassed the 2015 goal in 2005 and the 2025 goal in 2009, almost entirely with wind power, according to the EIA. Texas is expanding its use of biomass in the production of electricity and solar. As of last July, several states, including Wyoming, South Carolina, Virginia, Arizona, Idaho and New Jersey, were moving forward to meet the CPP's requirements, regardless of federal policy.

We do not believe the activities outlined in Mr. Trump's executive order will curb the long-term decline of the coal industry.

By contrast, we expect the order to give utility providers more time to invest in green alternatives, and to extend the useful life of fossil fuels. Ultimately, we believe it is unlikely that companies will decide upon investment in coal as a sustainable strategy relative to cheaper and cleaner energy sources.

Joshua Kendall is ESG analyst with Insight Investment based in London. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.