What the Fall of the Coal Industry Means for Your Portfolio

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The energy sector might be a cyclical industry in terms of stock performance, but the need for energy is something that will always exist. But with so many various forms of energy available, traders are left with a hard choice to make about where to invest.

The political climate seems to shifting away from fossil fuels, like coal and oil, and favoring greener alternatives, like solar and wind. But tried-and-true methods still have plenty of pull globally with countries like China and India heavily reliant on coal and oil.

In the United States, the coal industry appears to be in its death throes with technology making solar power more competitive, and in some cases cheaper, than coal. Despite the proclamations of the current political administration, coal isn’t likely to make any real comeback. But as coal starts to be phased out of the modern energy infrastructure, there’s going to be a major vacuum that investors could potentially take advantage of.

The rise of a new industry

Coal’s popularity in the energy industry has always been the low-cost relative to alternatives. But cheaper natural gas and renewable energy sources are ultimately putting the coal industry out of business. It’s not a political attack that’s driving coal down, it’s simple economics.

About a decade ago, coal was responsible for around half of U.S. electricity generation. But that percentage has fallen to less than 30 percent – under the 33 percent that natural gas currently provides for. Meanwhile, renewable energy, including hydroelectric, has jumped from the low single digits to more than 10 percent and keeps trending higher at an exponential rate.

Another threat to coal is the length of time needed for a coal plant to be built and come online compared to the relative quickness of a natural gas plant. Many companies feel that by the time a new coal plant comes online, it will no longer be cost effective, leading to a gradual phasing out of coal-fired power plants.

One of the biggest campaign goals for the Trump administration has been bringing back coal jobs to America. However, the coal industry only represents about 50,000 people – far less than other energy industries like solar. Places that have historically been known as capitals of the coal industry like Pittsburgh have already changed in response to the lack of coal opportunities. Pittsburgh’s largest employers now are University of Pittsburgh Medical Center and Carnegie Mellon University.

One industry some investors believe will replace coal is nuclear. But that’s unlikely to happen as nuclear plants take decades to fully come online. The initial price of a nuclear power plant is extremely cost-prohibitive, as well making nuclear an unlikely successor to coal. It will be renewables, such as solar and cleaner fuels like natural gas, that will replace the coal industry in the coming decades. Investors that want to stay in the energy sector should stay away from coal in favor of these types of industries.