Coal Recovers Lost Ground As Natural Gas Prices Rise

on June 11, 2013 at 10:00 AM

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Competition between coal and natural gas is intensifying

When the price of natural gas dipped below $2/MMBTUs in April 2009, the dash for gas set off in earnest. Any utility who could switch did switch from coal to natural gas. Not everyone could, of course, either because of the logistics, long-term fuel contract obligations or for technical reasons. By April 2012, when the price hit the $2 mark for the second time, the unthinkable happened: For the first time in history, US gas-fired generation matched that from coal. Coal was losing market share to cleaner burning gas at unprecedented low prices in recent memory.

Since then, coal prices have stayed low or fallen in some cases due to the glut of supply while gas prices have risen 60% to around $4/MMBTUs. At these prices – and with the expectation that they may go even higher – coal has regained some of its lost market share.

In early May 2013, Genscape’s Generation Fuel Monitoring, reported that coal-fired power generation in the US rose 21% in March 2013 relative to March 2012, while gas fired generation fell 11%. Over the same period, electricity demand has grown 2% as the US economy comes out of a slump.

Monthly generation data, of course, tend to be misleading since they are subject to big swings due to weather, logistical and transportation constraints, variations in hydro generation and so on. For example, renewable generation in March 2013 was down 14% compared to March 2012 due to lower hydro output in the Pacific Northwest. Year to date data shows gas down 8%, coal up 12%. Relative prices do matter as do supply and demand fluctuations.

Conventional wisdom says that gas will beat coal – all else being equal – if natural gas prices remain below $5-6, and in the absence of speculation about future price rises. Clearly, many coal-fired generators are elated to see the recent rise in gas prices and cannot wait to gain lost ground. Their revenge, however, may be short lived. There is plenty of gas underground. Higher gas prices are likely to encourage more exploration and more drilling, leading to increased supplies and eventually lower prices, repeating the cycle. The battle between the fossil fuel titans has only begun.

The Energy Information Administration (EIA) in its latest Annual Energy Outlook 2013 (AEO) explains the same by pointing out that in 2012, average annual fuel price for a MMBTU of natural gas delivered to power plants in the US was essentially the same as coal. That explains the massive switch to natural gas during 2012. Partially because of the switch, and partly because the depressed prices discouraged further drilling, price of natural gas has risen in the past 12 months. US economy, is also slowly recovering, boosting demand. If hydro reservoirs are below average or there is a hot summer with increased demand for air conditioning, natural gas prices can spike. What is new?

Going forward, EIA projects a number of scenarios of how things may evolve. Depending on which scenario you like, you’ll end up with a different outcome. There is a lot of interest to know which scenario will prevail, if one only had the crystal ball.

In virtually all cases, power generation from natural gas will continue to increase over time because building future coal capacity is likely to be expensive and restricted due to existing and impending emission regulations. The outcome will also vary by the relative cost and availability of other generation sources.

under a scenario where nuclear generation is reduced by 2040, natural gas is likely to play a more dominant role than one in which nuclear output increases. Everything, in other words, depends on everything else, making it rather difficult to decide which scenario will prevail.

Perry Sioshansi is the editor of EEnergy Informer, and a consultant for energy firms. He can be reached at [email protected].

A recent book, Smart Grid: Integrating Renewable, Distributed, and Efficient Energy, edited by Sioshansi, explores the many dimensions of the smart grid . With contributions from a number of prominent experts, scholars and practitioners with different perspectives, the book provides a broad coverage of the what, how, when, why and other facets of the smart grid.