ANALYSIS: Coal-to-gas switching likely to ease on gas price lift
Houston (Platts)--8Nov2012/258 pm EST/1958 GMT
Coal-to-gas switching at US power plants will ease in the winter months
as natural gas prices continue to settle well above their lows of earlier
this year, analysts said, although they disagreed on the prospects of fuel
switching in 2013.
"The forward curve is pricing in a level of coal displacement that is
not sustainable," said Shiyang Wang of Barclays Capital.
Wang noted the highest level of fuel switching came in April at about 9
Bcf/d, when prices averaged below $2/MMBtu, but it pulled back significantly
in the summer and shoulder months as gas prices rallied and have climbed back
up to the mid-$3/MMBtu range.
Coal displacement will come down by roughly 2.5 Bcf/d in winter
2012-2013 from the 6 Bcf/d to 7 Bcf/d average of this year, Wang said. In
October, coal displacement has come down to slightly below 4 Bcf/d, she added.
Meanwhile, American Electric Power is seeing a switch back to coal at
its generating units with gas prices rising, AEP President and CEO Nick Akins
said in a recent earnings call. The capacity factors of gas units are
starting to drop as prices get into the $3/MMBtu to $3.25/MMBtu price range.
Credit Suisse analysts said recently year-over-year demand through
September seems to point toward a slight decline. The bank estimated gas
could lose 2.4 Bcf/d to 5.1 Bcf/d of market share to coal if gas prices are
between $3.50/Mcf and $4.50/Mcf.
Platts spark spreads data currently shows coal-fired generation compares
more favorably than gas-fired generation than it did at the height of fuel
switching in April. For PJM West, coal has held about an average $7.40/MWh
premium over gas for the month-to-date in November, compared with an average
discount of more than $8.75/MWh in April.
In the Electric Reliability Council of Texas, coal rose to about a
$4.70/MWh average premium over gas month-to-date in November from a roughly
$8.40/MWh discount in April.
At the ISO New England's Mass Hub, coal has averaged at almost a $20/MWh
premium so far in November, compared with a nearly $11.50/MWh discount in
For the year ahead, Platts forward data showed peak marginal heat rates
for calendar year 2013 moving downward from year-to-date 2012 averages.
At PJM West, Platts data showed the peak marginal heat rate for calendar
year 2013 at 12,024 Btu/kWh on Tuesday, down from the year-to-date average
peak marginal heat rate of 14,553 Btu/kWh for 2012.
For ERCOT North, the peak marginal heat rate on Tuesday for calendar
year 2013 was 12,021 Btu/kWh, compared with the 2012 peak average 13,481
At Mass Hub, the peak marginal heat rate for calendar year 2013 was
about 9,877 Btu/kWh, compared with an average peak marginal heat rate of
about 11,360 Btu/kWh for 2012.
Barclays estimates that if prices average around $4/MMBtu in 2013, coal
displacement could fall back to 2011 levels, at around 3.5 Bcf/d compared
with 2008 levels. On Wednesday, the NYMEX strip for 2013 settled at
Barclays said in a Tuesday report its coal cost curve shows that at
$3.50/MMBtu, without logistic constraints, the maximum amount of coal that
gas could displace is 5 Bcf/d. They also noted 4 Bcf/d to 5 Bcf/d of coal
displacement is required to balance the gas market in 2013.
But some analysts believe coming coal-fired unit retirements will keep
gas prices elevated.
In 2013, coal unit retirements are expected to do away with upward of
2,720 MW of nameplate capacity in the US, according to Platts data. In 2014,
another 1,615 MW of retirements have been announced. Meanwhile, there is
about 8,300 MW of gas-fired nameplate capacity scheduled to come online in
Teri Viswanath, director of commodity strategy at BNP Paribas, said
lower utilization at coal plants and the robust coal-to-gas switching this
year may force more coal plants into retirement, and that could push gas
prices over the $4/MMBtu mark in 2013.
BNPP's year-over-year projections show gas demand for electric power
dropping 1.52 Bcf in 2013, not as severe as the Energy Information
Administration's projection of a loss of 2.64 Bcf/d.
"If we are looking at a loss of 2.6 Bcf/d, we'll see storage levels that
look a lot like the ones we have," she said. "The problem is, we will be deep
into winter and probably into spring before we know how electric demand has
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