Houston (Platts)--8Mar2010/622 pm EST/2322 GMT

Natural gas prices could hold at low enough levels in 2010 for power generators to switch away from marginal coal-fired units to cheaper gas-fired plants, in part replicating a cycle seen in 2009, analysts said.

With spot natural gas prices reaching into the mid-$4.50s/MMBtu and a comfortable feeling about supplies coming into shoulder season, several analysts said the market is prime for gas to again displace coal supplies.

In a February 23 report, three Barclays Capital analysts wrote that similar conditions in the gas and coal markets allow for the commodities to contest for market share like in 2009.

Analyst Michael Zenker, one of the report's authors, said the factors add up to a dynamic in which gas again displaces coal, albeit at lesser levels than in 2009.

"In 2009, meaningful coal switching began at $5.50 for Henry Hub gas," he told Platts on Monday. "We think that number moves down to $5 this year, owing to coal prices and, like last year, that grows exponentially as gas prices fall below that."

The Barclays group said power demand is forecast to be low enough to leave open the options for natural gas-fired generators that would otherwise be used to meet supply needs during the peak cooling season in the summer, when coal plants typically run.

In that scenario, gas could fight for market share if prices hold low enough. Zenker and the Barclays' analysts said in the report that incremental gas demand in 2009 was heavily tied to price, with utilization spiking once Henry Hub prices plunged below $4.50/MMBtu.

Availability is a major factor in how much gas will displace coal, however.

"The displacement of coal will be capped by the amount of spare natural gas-fired generating capacity," the analysts said in the report.

Greg Hopper, managing director of Black & Veatch, also said that natural gas was the beneficiary of displacement in 2009 in part because several coal-fired plants were offline.

"With the new plants up and on-stream, there is a firming of coal versus natural gas," he said. "With those plants online [coal] will take more of that market share back."

With the new coal capacity online, the Barclays group said the real balance-tipper may be in how those large stockpiles are used. If the large stockpiles prove too much, the supplies could force operators to burn the fuel no matter the prices of natural gas, raising the coal-switching floor.

"Should the mountainous coal piles surrounding plants and deferred deliveries of coal from 2009 to 2010 dominate, gas will have a tough time displacing coal this year," the analysts said. On the other hand, if international coal prices remain strong and tug up the price of Appalachian coal, dispatch costs of coal in the Northeast could increase and give gas an upper hand.

--Adam Bennett, adam_bennett@platts.com