US power prices to remain low until generators burn more gas: analyst

Houston (Platts)--17Jan2012/221 pm EST/1921 GMT

US wholesale electricity prices are in a "trough" and could stay there until the "structural oversupply" of natural gas is mopped up by more generators switching to gas from coal, Macquarie Equities Research said Tuesday.

Power prices are down because of unseasonably warm weather and low gas prices, the report said. "We find little upside to long-term gas fundamentals in the US," Macquarie said, adding that coal prices are also moving lower under pressure from gas prices.

Over the long-term, the report said power prices should strengthen when the economy improves and if and when the US Environmental Protection Agency's Cross-State Air Pollution rule is reinstated. The US Circuit Court of Appeals for the District of Columbia halted implementation of the rule that would create a trading program for sulfur dioxide and nitrogen oxide emissions until it rules on a legal challenge.

Still, the report cautioned that "comfortable reserve margins" in some regions could limit the potential upside for power prices.

Further, Macquarie said the US gas supply surplus and resulting lower prices could continue for three years or more, adding that barring extreme weather in 2012, supply could exceed the 4.1 Tcf of available storage capacity unless generators switch increasingly from coal to gas.

The report said coal-to-gas switching "has been breaking historical highs, most recently at 9 Bcf/day, up almost 6 Bcf/d year-over-year, and yet that is still not enough to provide support to gas prices."

The report said that with combined-cycle gas-fired plants running at just above a 50% capacity factor, more coal-fired power could be displaced by gas. Macquarie estimated the amount at up to 3-4 Bcf/d, but acknowledged that could be limited by gas transmission constraints.

The report said that with CCGT's operating at only 50% of capacity, there is 20% to 25% of incremental CCGT capacity left that "theoretically" could displace about 100,000 MW of coal-fired generation capacity.

"The utilization rates vary by region," the report said, "with spare capacity still available in California, the Southeast and, at nights, in Texas, among others," the report said.

Coal prices have fallen "in sympathy with gas," causing what the report called a "double-whammy for power prices."

While exporting coal is becoming "increasingly appealing" to US producers, the report said that "as long as natural gas prices keep falling we would expect further pressure on thermal coal prices."

--Jeffrey Ryser, jeffrey_ryser@platts.com

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