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Gas, renewables will fight for market share, leaving coal behind, report says

Natural gas has beaten coal for the market share for power generation and will spend the next decade competing against an exploding sector of renewable power providers, according to financial services firm Morningstar.

Renewables will continue to grow 142% through 2020, Morningstar said in an Oct. 18 note, while gas-for-power is expected to grow 33% over the same time, partially on the back of renewables. Quick-starting gas plants will be needed to react when wind and solar is unavailable, Morningstar added.

By 2030, Morningstar expects gas to have 41% of the power market, while renewables will have more than doubled its share to 22%, with most of the gains coming at the expense of coal.

"The future of coal remains ugly as it market share plummets," Morningstar said. The equity research firm expects coal's current 27% market share to be slashed to 15% in the next decade. Coal demand continues to be squashed by falling renewable costs and the huge supply of natural gas, according to Morningstar. "The most lethal of these was cheap natural gas and the development of highly efficient combined-cycle gas turbine power plants," Morningstar said.

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Breaking with predictions by the U.S. Energy Information Administration, Morningstar expects renewables to continue to grow even as wind and tax credits expire because of corporate demand for renewable power and state-level renewable portfolio standards, or RPS. Alongside growing demand, Morningstar expects technology improvements will continue to drive the cost of renewable power down.

"Our bullish view of renewable energy is due primarily to utilities adding renewable energy to achieve state renewable portfolio standards," Morningstar said. "This policy growth is supplemented by our forecast for strong renewable energy growth in states like Texas and Iowa, which have already surpassed their RPS, and Florida, which does not have an RPS."

The specific demand for zero-emission power from states and corporations also insulate renewables from cheap natural gas prices, the report said. Morningstar expects gas prices to increase roughly in line with inflation: hitting $3/MMBtu in three years and then increasing 2.25% per year through 2030, a level 16% below the EIA's base case forecast.

Integrated utilities such as Dominion Energy Inc., Duke Energy Corp., NextEra Energy Inc., Southern Co. and Xcel Energy Inc., that are shuttering coal plants and shifting to gas and renewables, benefit the most in a future where gas and renewables begin to fight for the market in power generation, Morningstar said. Those companies "are investing billions in narrow- and wide-moat projects that should result in strong earnings and dividend growth over the next decade," the research firm said. "Moats" is an economic term used by Morningstar to define how long companies keep a competitive advantage in their specific industry.