The Challenges for Coal Stocks are Just Beginning

2012 hasn't been a good year for coal stocks, and if the U.S. Energy Information Administration is right, the next eight years aren't shaping up to be any better. The EIA said in its recent Annual Energy Outlook report that 49 GW of coal generation capacity could be retired by 2020 -- that's a sixth of the nation's coal plants.

The level of retirements is only the reference case for the EIA's analysis and will be affected most heavily by the price of natural gas and economic growth. The worst-case scenario for coal is that gas remains at a low price and economic growth remains slow. Under those circumstances, as much as 70 GW could be retired.

Drivers of coal's demise
The EIA says that older, more inefficient plants in the eastern U.S. will be the first to go, pointing the finger of blame squarely at natural gas. Natural gas is hitting coal not only from an environmental-impact standpoint, but also on the marginal rate for power generation, and with the low price of natural gas, this makes coal power plants less profitable.

This is bad news for companies that supply coal to the nation's coal plants. Alpha Natural Resources (NYS: ANR) , Peabody Energy (NYS: BTU) , James River Coal (NAS: JRCC) , and Arch Coal (NYS: ACI) have already plunged this year, but the future trends aren't looking any better. They'll need to ration even more capacity to stay in business, and I wouldn't be surprised if losses continued to mount in coming years.

Foolish bottom line
Some investors think that when a stock is down, it will eventually bounce back. For coal, all of the evidence points not to a mere short-term plunge, but rather to a long-term decline in the industry. I still don't think coal stocks are good buys, no matter how far they've fallen, and more will end up in bankruptcy, just like Patriot Coal.

Investors should avoid coal stocks, but there are parts of the energy sector that are thriving. Find out which stock our analyst think is the only energy stock you need in our free report found here.

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Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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