Six Ways to Invest in the Coming Coal Boom

And this isn't just a projection. In the past year, 30% to 40% of orders for new electricity turbines were for coal-fueled generators; 20% to 30% were for gas-fired turbines.

The projections for the next decade would be a huge shift in the market. Between 1997 and 2000, the peak of the move to natural gas for electricity generation, natural gas accounted for 60% to 70% of new electricity power plants. Coal's share was just 20% to 30%.

That shift means big growth for coal demand. The U.S. Department of Energy's Energy Information Administration projects that coal consumption in the U.S. will climb 73% to 1.9 billion short tons in 2030, from 1.1 billion short tons in 2004.

I think that projections of the growth in coal demand are likely to be low, too. They underestimate the appeal of stable supplies to utilities planning their next generation of projects.

Hey, if you want to believe that energy supplies are stable in a world where Russia, Iran, Venezuela, Saudi Arabia and Nigeria are major sources of energy, be my guest. Utility executives making decisions on $1 billion capital investments are having nightmares about supply disruption from sources like those. The European countries are as adamant about reducing carbon emissions as any on earth, but coal is making a comeback even there. In Germany, RWE started construction on a 2.2 gigawatt coal plant last year.

I think there are two ways for investors to play coal as the fuel of the future: You can buy the shares of coal producers, or you can buy the shares of the companies that make coal-burning power plants.

The Producers

My top three picks among coal producers are, in alphabetical order, Arch Coal, Consol(CNX Quote) and Peabody Energy.

Arch Coal has the most exposure in the coal sector to improvements in pricing and supply in Wyoming's Powder River Basin. This November's selloff among U.S. coal stocks was a result of falling prices for the low-sulfur coal produced from this region and disappointing production volumes caused by the need for repair and maintenance work at mines in the area.

Powder River Basin coal prices have stabilized recently, and with stockpiles at utilities low because of past production problems, sales growth should be healthy in 2006. Prices could well move up sharply as customers move to lock in supply for delivery in the second half of 2006, when production could again be constrained by maintenance work at the mines. A reasonable target price for December 2006 is $95 a share.