Coal-to-gas switch in US Southeast driven by price, new builds through 2015By Samantha Santa Maria in Houston, Chang Noh in Washington May 11, 2012 - The Southeast, the top power-consuming region in the US and the leader in coal-to-gas switching, is poised to become a gas-on-gas battleground as Marcellus producers aim to win market share from other shale basins and traditional Gulf supplies. The trends that make region the prime target of gas producers and pipelines are set to continue, Platts analysis shows, and plans to increase gas supply through a host of new pipeline builds and expansions are likely warranted. (See related map: US Southeastern gas pipeline expansions) Compounding the expected demand uptick are wide gas vs. coal generation margins, with historically low-priced gas remaining far more profitable over coal plants that burn Central Appalachia (CAPP) coal, which dominate the generation space in the Southeast. Coal companies have been feeling the tremendous pinch of low gas prices for several months. Alpha Natural Resources president Paul Vining, in the company's first-quarter earnings call, related the current day-to-day dynamic. "Customer calls us, they want to defer 500,000 tons," he said. "We say 'No thanks, you need to take the coal.' Discussion ensues, trader comes along, buys the coal from them, puts it on some existing business they have overseas where they have taken a short, and they dispatch gas and everybody comes out ahead," Vining added. Regional gas still loses out to low-sulfur Powder River Basin coal-fired plants through 2015, but these are already a minimal presence in the region's generation mix in the region due to high transportation costs, despite the relatively low price between the fuel itself, Platts analysis indicated. Of the overall coal-fired generation capacity in the Southeast, PRB-burning plants account for less than 1%, according to data from Platts unit Bentek Energy. Even with PRB coal trading at less than $10 per short ton, it is not seen as a realistic option in the Southeast. Sean Murphy, vice president of fuels and emissions at GenOn, said, "The opportunities for PRB conversion are limited at best. The biggest obstacle is money -- even if you can lower your fuel costs, the fact is coal plants are making no money right now. When you consider the capital for conversion -- all plants will have to spend some money to convert -- the numbers don't work." Prices for CAPP coal burned by generators in the Southeast have fallen from a near-term high of $79.75/st on June 8, 2011, to $59.10/st as of May 9, 2012, Platts prices show. But that 26% decline has not lessened the pressure on coal-burning generators because remarkably low electricity prices from cheap gas continue to pressure margins for electricity sellers, particularly those not taking advantage of cheap gas. So far this year the average on-peak next-day electricity price for the Southern Company control area in the middle of the Southeast is $26.27 per megawatt hour, according to Platts price data, down 33% from the comparable 2011 price of $39.35/MWh, and 61% below the comparable price for the same period in 2008 of $67.41/MWh. (See related chart: Into Southern Peak TDt: Jan 2, 2008 - May 8, 2012) The Southeast receives between 43% (Mississippi) and 93% (North Carolina) of its coal supplies from West Virginia and Kentucky, according to Energy Information Administration data from 2011. Alabama is a slight anomaly, receiving about 13% of its coal receipts from these two states, as 48% of its coal comes from the state itself, classified by EIA as southern Appalachia. Currently, the Southeast is consuming about 6.2 Bcf/d of gas for power generation for the year-to-date, Bentek data shows, up 26.5% from 4.9 Bcf/d last year. The largest consuming states are Florida (2.8 Bcf/d), Alabama (893,000 Mcf/d), Mississippi (781,000 Mcf/d) and Georgia (439,600 Mcf/d). Pulling up the rear are Tennessee (137,000 Mcf/d), South Carolina (244,000 Mcf/d) and North Carolina (285,900 Mcf/d), according to Bentek data. In contrast, coal receipts in the first two months of the year have been largely in decline in the region. According to preliminary EIA data, bituminous coal receipts in Florida totaled 2.8 million st in the first two months of 2012, down 8% year-over-year. Alabama is down 21.5% to 931,000 st over the same period. Mississippi was up 4.6% to 427,908 st, Georgia was down more than 32% to 2 million st, Tennessee dropped 70% to 732,297 st, South Carolina was down 9.3% to 1.7 million st and North Carolina was down 26.3% to 3.5 million st. Trend of more gas, less coal into US Southeast set to continueThe trend of more gas and less coal coming into the region is expected to continue and perhaps even accelerate both in the near and long term. In the short run, the historically low gas prices and widening margin between the NYMEX gas and coal futures contract has encouraged significant coal-to-gas switching, especially in the Southeast. (See related chart: Coal-to-gas price conversion: Jan 2, 2008 - May 8, 2012) Analysts estimate that year-to-date switching has added to gas demand by between 4 Bcf/d to 8 Bcf/d across the country, particularly in Southeast, where gas demand for generation has increased 27.8% year-on-year so far, or some 1.4 Bcf/d -- the biggest increase in the US. Tudor Pickering Holt & Co. has estimated around 2.8 Bcf/d of coal-to-gas switching occurred last year in the US, 2.5 Bcf/d in 2010 and 3 Bcf/d in 2009. Going forward, gas demand for power in the Southeast for the peak summer months of July through August is forecast to increase from 8.1 Bcf/d in 2010 to 10.1 Bcf/d this year to 11.2 Bcf/d in 2015, ultimately a 38.3% increase from 2010 levels, according to Bentek. The biggest uptick in gas demand, analysts said, is coming from the increased use of combined-cycle gas turbine plants, which due to an overbuild in the early 2000s that added on about 180 GW of new gas generation, have sat at extremely low utilization rates of between 40% and 50% for years. This year, analysts said, these plants are running at historically high rates of about 70% and 80% because of the low gas price environment. "We are in a unique moment," said Cody Moore, EDF Trading North America's senior vice president of power. "We've been given a lab on what the market might look like. The gas infrastructure is being tested right now for its reliability and its capabilities to deliver gas to power plants. And notwithstanding a few congestion issues, it's worked out well." Gas margins fare better than coal through 2014 Going forward, the gas price advantage looks set to hold. In Florida, the gas marginal fuel cost holds a $7.99/MWh discount to CAPP coal in 2013, according to an analysis of Platts-ICE forward curve assessments, but a $7.04/Mwh premium to plants fired by PRB. (See related table: CAPP coal- & natural gas-fired marginal costs: Florida - 2013, 2014) In 2014, those margins widen slightly with gas holding a $9.39/Mwh discount to CAPP, but a $7.43/MWh premium over PRB. In the Virginia and Carolinas (VACAR) sub-region of the Southeastern Electric Reliability Council (SERC), gas' discount to CAPP coal in 2013 comes in at $7.11/MWh, but its premium over PRB coal is $7.91/MWh, Platts prices show. (See related table: CAPP coal- & natural gas-fired marginal costs: SERC VARC - 2013, 2014) In 2014, the gas-to-CAPP discount stands at $6.74/MWh, but its premium to PRB widens to $10.09/MWh. VACAR includes Progress Energy's Carolina Power and Light east and west, Duke, South Carolina Electric and Gas, Santee Cooper and the Southeastern Power Administration. It is in Florida and the Carolinas that the majority of the region's power generation fuel mix is set to dramatically change over the next few years. Currently, Florida's power generation mix is the most heavily weighted toward gas in the Southeast at 56%. Florida power plants reported fuel receipts of 21 million short tons of CAPP coal last year, with shipments from West Virginia and Kentucky mines accounting for 13.8 million short tons, or 66%, according to EIA data. In contrast, North Carolina is the state most heavily weighted toward coal, with around 56% of its generation coal-fired, according to state data. Some 23 million short tons, or 93%, of the total 24.8 million short tons of CAPP coal shipments into the state, came from West Virginia or Kentucky last year, EIA data shows. Going forward, 42 units at 13 separate plants, totaling some 8,261 MW of capacity, in the Southeast are set for retirement from now through 2017, Platts data shows. (See related table: Retiring power plants) Thirty-seven of those are coal-fired, totaling about 6,378 MW or 77.2% of the total capacity being retired. Ten of those retiring coal units are in North Carolina, 12 in Tennessee, six in Alabama, five in South Carolina and two apiece in Georgia and Florida Of 118 units at 77 separate plant locations coming online during the same timeframe, bringing on some 13,874 MW of capacity, 23 are natural gas. These total 8,437 MW or 73.1% of all new generation set to come online. Thirteen gas-fired units are set to come online in North Carolina, five in Georgia, four in Florida and one in Tennessee. On top of gas' price advantage are looming Environmental Protection Agency regulations that could help compel generators to move away from coal over the next few years. Under the EPA's Mercury and Air Toxics Standards, existing generation sources generally will have up to four years if needed to comply. That includes three years provided to all sources by the Clean Air Act -- which the EPA says will be sufficient time for most sources to comply -- plus the additional year that state-permitting authorities can grant as needed for technology installation. The ruling went into effect April 16. Additionally, the Cross-State Air Pollution Rule requires states to reduce power plant emissions that contribute to ozone or fine particle pollution in other states. By 2014, the rule and other state and EPA actions are expected to reduce SO2 emissions by 73% from 2005 levels and NOx emissions by 54%. CSAPR was initially meant to begin January 1, but was stayed by the courts at the eleventh hour. A court decision may come this summer. With gas likely to be the fuel to fill the supply gap, pipeline companies are busy planning expansions or new systems to fulfill the expected demand uptick. To subscribe or visit go to: http://www.platts.com |