5 power plays for natural-gas stocks

By Jim Jubak

The renaissance in coal-fired electric plants has hit a snag, and some areas of the United States could be looking at electricity shortages and soaring utility bills at a time when family budgets are already stretched. The quick fix -- and the only one available because we don't have a national energy plan -- is to build more power plants that burn natural gas.

And that's why I'm recommending North American natural-gas stocks, instead of the shares of oil companies, for purchase in 2008 (or as soon as you think the stock market has found some kind of stability).

In this column, I'll explain why I think this is a year to get gas and give you the names of the five best stocks in that sector.

Demand outstrips supply

Here's the problem: The North American Electric Reliability Corp. calculates that more than 10,000 megawatts of power-generating capacity need to be added annually in the U.S. to keep up with projected growth in demand for electricity. Average peak demand for electricity in the U.S. is projected to grow 2% per year over the next 10 years.

New coal-fired plants were supposed to supply much of that electricity, and proposals for plants have been steaming ahead. From a proposed 750 megawatts in 2003, planned coal-fired capacity climbed to 23,700 in 2006. But cancellations have been running at an even faster pace. According to the Platts Global Power Report, 35,061 megawatts of coal-fired capacity were canceled or delayed in 2006, and the same for 26,096 megawatts in 2007.

Just 808 megawatts of new coal-fired capacity are expected to actually go on line in 2008, plus 6,498 megawatts in 2009 and 8,285 megawatts in 2010. But with delays and cancellations so common, all of that added capacity may not materialize. That's even more true beyond 2011; cancellations of announced plants hit harder when plants are three or more years from completion.

Even if all of the announced coal-fired plants are built as scheduled, you'll notice that new capacity still falls short of 10,000 megawatts a year.

Environmental issues dog coal

Why is this? Uncertainty. Because the U.S. has adopted delay as its official energy policy (see my Jan. 8 column, "Profit from a stupid energy policy"), no one in the utility industry knows what the future holds.

Legislators could slap plants with rules to reduce greenhouse-gas emissions, for example. These could require expensive new equipment or retrofits of recently built plants. In some cases, plants might simply be unable to meet new standards. Duke Energy (DUK, news, msgs), for instance, recently announced that it won't build any coal-fired plants in the Southeast because the geology there is unsuitable for injecting captured carbon dioxide deep underground, which could turn out to be the required solution for reducing carbon emissions from coal-burning plants.

This uncertainty hits utilities where it counts the most: in their ability to raise capital to build plants. In early February, three of the country's biggest investment banks, Citigroup (C, news, msgs), JPMorgan Chase (JPM, news, msgs) and Morgan Stanley (MS, news, msgs), announced lending guidelines that make it harder for utilities to borrow money to build coal-fired power plants. Borrowers must submit plans for how they intend to offset carbon emissions and to account for future costs from new such regulations.

Wind and solar aren't enough

All this has utility companies searching for alternatives to coal-fired power plants. Energy from renewable sources such as wind and solar will fill some -- but just some -- of the gap. Last year, after the Florida Public Service Commission killed plans at Florida Power & Light (FPL, news, msgs) for a coal-fired plant that would have gone on line in 2013 or 2014, the utility looked at solar and wind. But it concluded that those sources would match only a fraction of the capacity of the coal-fired plant, so FPL will speed up construction on generators fired by natural gas.

And if that's the decision at FPL, the leading producer of electricity from wind power among the country's utilities, you can bet the rest of the utility industry is reaching the same conclusion, especially because natural-gas-fired electric plants have a known design that's relatively easy to build.

Continued: Natural gas to the rescue

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