One of the largest companies that owns utilities in the U.S., Southern Company, announced a big deal this week that highlights just how aggressively power firms are looking to boost their natural gas power resources at the expense of the declining coal industry.
On Monday, Southern Company (SO) said it plans to buy natural-gas distributor AGL Resources (GAS) for $8 billion in cash. The deal, which is for $12 billion but includes $4 billion in debt, offers AGL shareholders a 38% premium over AGL’s stock price when the deal first closed.
When combined, the new company will be the second largest U.S. utility with 9 million customers, and will be positioned with AGL’s natural gas pipeline. Bloomberg estimates that the combined company’s natural gas use will grow 22% from 1.8 billion cubic feet a day to 2.2 billion cubic feet a day by 2020.
Coal plants, which currently provide 39% of U.S. electricity, have closed all over the U.S. in recent years. Twenty three gigawatts—or 7% of US coal capacity—will be taken offline this year, according to Bloomberg New Energy Finance. For comparisons sake, a large coal plant can have enough capacity for about one gigawatt.
The retrenchment is partly due to the abundance of lower cost natural gas that has become readily available from shale deposits in states like Pennsylvania, West Virginia and Texas. By some estimates the U.S. now has 360 trillion cubic feet of proven natural gas in the ground that can be recovered.
It’s also because federal environmental regulations have started—and will likely continue—to push dirtier-burning coal out of business. Older coal plants have had to undergo expensive upgrades to make them cleaner, and many of their owners have opted to just shut them down instead of retool them.
That transition will likely continue if President Obama’s controversial Clean Power Plan remains in effect. The mandate, developed with the Environmental Protection Agency and recently finalized, imposes rougher rules on power plant operators to lower greenhouse gas emissions.
Many carbon emissions in the power sector come from coal plants. The Clean Power Plan is expected to help boost natural gas use while substantially cutting coal use.
There’s so many decommissioned coal plants that companies are being creative in how they reuse the newly vacant land. Google, for example, says it plans to build a new data center at an aging coal plant in rural Alabama.
This transition means that the coal industry is in real trouble. According to analysts, coal producers’ revenues have dropped at least 25% over the past three years while their profits have turned into losses. As a result, coal companies are cutting jobs. Meanwhile, some like Alpha Natural Resources, which lost $875 million in 2014, have filed for bankruptcy.
This shift in the energy industry means that big utilities like Southern Company have been forced to shed coal assets. Over the years, the company has announced plans to close over a dozen coal plants. But in keeping with its big billion dollar deal this week, Southern Company is pushing more into natural gas. Currently, 42% of its power generation from coal and 39% from natural gas—with those numbers. Down the road, natural gas could become its dominant power source.