Coal-to-gas switch to continue through 2013-2014: S&P

Washington (Platts)--5 Dec 2012 541 pm EST/2241 GMT

Coal displacement by natural gas will remain a feature of the power market for the next few years, barring a significant pullback in gas supply, according to Standard & Poor's RatingsDirect credit analyst Aneesh Prabhu.

Prabhu's market projections were detailed in a RatingsDirect report released on Wednesday. Standard & Poor's, like Platts, is a unit of McGraw-Hill.

Based on the current shape of the US natural gas forward curve, the market does not appear to be anticipating a cutback in gas supply.

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"Ominously, for coal-fired generators, spot gas prices are biasing the forward gas curve to the downside," the report said. "In the absence of any market contango (when long-term prices are higher than near-term prices), even forward 'dark' spreads (gross margins for coal-fired generation) have turned negative for eastern coal plants."

The negative margins are a more serious prospect for merchant plant operators, which have gone from struggling to maintain market share to struggling to survive, Prabhu added.

By region, anecdotal evidence of large-scale switching from Appalachian coal to natural gas is emerging, Prabhu said.

"Generators have announced a wave of coal-plant retirements over the past six months, most of which appear to have resulted more from economic considerations than concerns about environmental compliance," Prabhu said.

For 2013, Prabhu is forecasting CAPP coal marginal fuel costs of $41.72/MWh compared to $37.83/MWh for combined-cycle gas turbines.

For the CAPP coal fuel cost, Prabhu assumed a total cost of $88/st, or $3.52/MMBtu. Coal plant heat rate was assumed at 11,000 MMBtu/MWh.

For natural gas, the delivered cost was estimated at $3.77/MMBtu, with a CCGT heat rate of 9,500 MMBtu/MWh.

Prabhu noted that coal-to-gas switching is not between the most efficient gas unit and the least efficient coa unit but instead units in the middle of the dispatch curve for each fuel type.

"The capacity factors of CCGT units average 37% in 2011," Prabhu said. "Should thisfigure increase to 50%, we expect natural gas demand from the electricity sector to increase by an incremental 5 bcf/d relative to consumption today."

--Charlie Noh, --Edited by Richard Rubin,

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