Coal's reclaiming of gas market share may not last

By Peter Maloney

April 30, 2013 - While there are several recent examples to indicate that coal-fired generation has been taking market share from gas-fired generation as natural gas prices rise, how long coal can hang on to that market share will depend on a variety of factors, chief among them the volatile price of natural gas.

Over the long term, the trend seems to favor gas-fired generation.

But in the short term, gas prices north of $4/MMBtu have favored the dispatch of coal over gas-fired generation.

Earlier this month, the Energy Information Administration reported that power generators consumed 3.5 Bcf/day of gas in March, a 16% drop compared with March 2012.

That report from the “Today in Energy” feature on EIA’s website coincided with news from utilities that are starting to see an increase in coal-fired generation.

Most recently, American Electric Power said that in the first quarter, its coal plants have been operating at about a 65% capacity factor, about double last year’s level.

“This probably represents the high-water mark for coal,” Teri Viswanath, director of commodities strategy at BNP Paribas, said. She noted that EIA's long-term projections have coal-fired generation under 40% past 2014. It is not necessarily that gas is better than coal, “it’s about the economics,” Viswanath said, and about the Environmental Protection Agency’s Mercury and Air Toxics Standards rule that, starting in 2015, puts in place more stringent emission rules that will severely limit which coal plants can run.

Right now, with gas forward prices pushing into the $4.50/MMBtu range, the economics favor coal. Coal prices, adjusted for plant efficiency, are as low as $3.48/MMBtu in the East North Central region and $3.78/MMBtu in East South Central to $4.44/MMBtu and $5.18/MMBtu in South Atlantic and New England regions, respectively, with a median adjusted price of $4/MMBtu, Viswanath said.

And, as Viswanath noted, there is a multiplier effect for gas burn depending on how coal intensive a region is. Coal could have the toughest time competing in New England, but there is less at stake because the region has relatively few coal plants.

Relative cheapness of coal to have larger effect on gas consumption

In the East North Central region, however, the relative cheapness of coal to gas could have a larger effect on gas consumption because there are 74 GW of installed coal capacity.

But as less gas is burned for power generation, demand for the fuel also declines, putting downward pressure on prices. Likewise, an increase in coal burn could exert upward pressure on coal pricing.

It is possible that those factors could reverse the balance of coal and gas generation.

“It is a fluid situation. The relationship continually goes back and forth. Gas and coal are constantly competing,” analyst Shiyang Wang at Barclays Capital said.

But she pointed out that there is often a lag in that reaction. Gas-fired generation does not decline as soon as gas hits $4.50 because there is some “stickiness” associated with running a power plant.

Plant operators do not generally decide whether or not to run a plant on a daily basis, but on a weekly or monthly basis, in part because it is more difficult, time consuming and costly to cycle a coal plant on and off than it is to cycle a gas plant, she said.

Wang said another factor in the equation is that coal prices are 7% lower this year than last.

Although that could make it harder for gas to displace coal at the same gas price level as last year, companies have worked down their coal inventories and that could offset the effect, especially during the summer because generators would not have to worry about having to burn coal due to high inventories.

Another factor that could depress gas prices is lower demand for electricity. Wang expects power load to drop 0.2% year-over-year 2012-2013.

Excluding the effect of swings in coal-to-gas displacement, that translates into a 1Bcf/day drop in gas burn this summer compared with last summer, she said.

Rise in gas prices to spark ‘supply response’

Adding to the uncertainty is the prospect that higher gas prices could spur more production. Or as Viswanath said, the conundrum the market faces now is whether the recent rise in gas prices will spark a “supply response,” tipping the balance of the market back to a surplus.

She sees that as a risk, but right now not one significant enough to require a revision BNP Paribas’ 2014 average price forecast of $4.50/MMBtu.

At that price, coal could dominate power generation in most regions for the rest of the year, but further out, gas looks like it will surely gain on coal again.

In its long-term outlook for generation, EIA says that in all five scenarios it ran in making its projections, coal-fired generation in 2025 is below the 2011 level and remains lower through 2040.

EIA identified several factors in the rise of gas fired generation, specifically a large, existing fleet of under-utilized gas plants, combined with a build-out of the natural gas pipeline network, higher coal prices and, most significantly, abundant new supplies of gas that have brought prices to historically low levels.

Gas plants more efficient than coal plants

In its long-term analysis, EIA notes that since gas plants are more efficient than coal plants, the point at which coal and gas switch back and forth in the dispatch stack is not a simple price comparison, but a ratio.

“When the ratio of natural gas prices to coal prices is approximately 1.5 or lower, a typical natural gas-fired combined-cycle plant has lower generating costs than a typical coal-fired plant,” EIA wrote in its Annual Energy Outlook 2013.

So at the current national average price for coal of $2.40/MMBtu, gas beats coal at prices up to about $3.60/MMBtu, EIA analyst Greg Adams said.

But limiting the view to just the next year or so, coal looks poised to beat out gas for power generation this year, depending on how hot the summer is.

“Parity in coal and gas is back in play,” said Chris Peterson, lead industry economist at EIA who was one of the authors of the “Today in Energy” report about coal winning generation share from gas.

A lot will depend on how hot the summer is and whether the current “injection hole” of 100 to 200 Bcf/day is filled by natural gas being pumped into storage facilities.

Last year was “freakishly aberrant,” Peterson said. It was the hottest summer on record, there was a lot of gas in the ground and production was growing, he said.

It could take a while for gas to gain as much market share over coal as it did last year, and that might not happen until coal plants planned for retirement in 2015 and beyond start to come offline, Peterson said.

But if there is more normal weather and gas production is growing and gas is in the low $4/MMBtu range, some gas plants, especially in the Eastern Interconnection, will outcompete coal at $4.00/MMBtu and $4.50/MMBtu, Peterson said.

EIA data shows coal taking lead

Meanwhile EIA’s most recent generation numbers show that coal has taken a lead. In February coal-fired generation was 124 million MWh, compared with 113 million MWh in February 2012, while gas generated 80 million MWh in February compared with 91 million MWh a year ago.

EIA did not have generation numbers to match the 16% drop in gas burn it reported for March in the April 11 “Today in Energy” report, although Peterson said that it could impute a number using metrics such as average heat rates.

There is a roughly two month lag between when generators report their numbers and when the numbers can be validated and published.

There is also a lag in reporting actual gas flows from users, but in the April 11 article, Peterson said EIA used numbers derived from an analysis by Bentek, which is part of Platts.

http://www.platts.com/newsfeature/2013/electricpower/uspower/index