Analysts expect power generators may favor gas over coal again in 2010
by Adam Bennett and Amena Saiyid
March 31 - Gas prices could hold at low enough levels in 2010 for power generators to switch away from marginal coal-fired units to cheaper gas-fired plants, much the same way as the cycle in 2009, according to analysts.
With spot gas prices reaching into the mid-$4.50s/MMBtu and supplies at comfortable levels ahead of the shoulder season, several analysts said the market is ripe for gas to again displace coal supplies, as it did in 2009.
"In 2009, meaningful coal switching began at $5.50[/MMBtu] for Henry Hub gas," Barclays Capital analyst Michael Zenker said March 8. "We think that number moves down to $5[/MMBtu] this year, owing to coal prices and, like last year, that grows exponentially as gas prices fall below that."
Seth Schwartz, managing director of Energy Ventures Analysis, said coal-fired generation declined 15.7% in 2009, while gas-fired generation increased 14.5%.
Eastern coal burn was down 20 million short tons for the year with the most declines occurring in the shoulder months of spring and fall, he said at Platts' 18th Annual Coal Investment and Properties conference in Florida last week.
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Central Appalachian coal bore the brunt of displacement, particularly in the Southeast where the coal burn was down by a "shocking 19.9%," he said.
Gas will continue to compete with coal as long as there is an excess supply of this fossil fuel.
Citing EVA's analysis, Schwartz said CAPP displacement begins when gas prices fall below $5.40/MMBtu and is huge below $4.50/MMBtu, while Powder River Basin displacement occurs when prices fall below $4/MMBtu and is significant below $3/MMBtu.
As the injection season approaches, gas prices are again nearing the level at which power generators evaluate the cost efficiencies of each fuel and make switching more of an issue, analysts say.
Low power demand in the spring and fall generally dictates that displacement is not as much of an issue because the higher-cost coal units are shut down and not available to displace.
Barclays analysts said they expect power demand to be low enough to leave open the options for gas-fired generators that would otherwise be used to meet supply needs during the peak cooling season in the summer, when coal plants typically run.
Under that scenario, gas could fight for market share if prices are low enough. Zenker and the Barclays analysts said in a recent report that incremental gas demand in 2009 was heavily tied to price, with utilization spiking once Henry Hub prices dropped below $4.50/MMBtu.
David Bellman, managing director of American Electric Power's strategic and economic analysis division, said at the recent Platts coal conference that the biggest threat to Appalachian coal comes from the over 200 Tcf of estimated gas reserves in the Marcellus Shale.
Bellman said he believes "the nexus between Appalachian coal and gas fired electric generation will favor natural gas as the basis to the Henry Hub erodes — and, perhaps, goes negative. The recent completion of the Rockies Express Pipeline has already reduced basis by more than 50%."
Furthermore, Marcellus gas production may spur pipelines to flow increasingly to the west in order to support electric generation growth, Bellman said.
However, availability is a major factor in how much gas will displace coal this year. "The displacement of coal will be capped by the amount of spare natural gas-fired generating capacity," Barclays said.
In addition, the number of coal-burning plants on line could also affect displacement.
Greg Hopper, managing director of Black & Veatch said gas was the beneficiary of greater displacement in 2009 in part because several coal-fired plants were off line.
"With the new plants up and on-stream, there is a firming of coal versus natural gas," he said. "With those plants on line, [coal] will take more of that market share back."
And with new coal capacity on line, the Barclays group said the real balance-tipper may be in how those large stockpiles are used. If the large stockpiles prove too unwieldy, the supplies could force operators to burn the fuel regardless of the price of gas.
"Should the mountainous coal piles surrounding plants and deferred deliveries of coal from 2009 to 2010 dominate, gas will have a tough time displacing coal this year," the analysts said.
In fact, Credit Suisse analyst Jonathan Wolff said he does not expect a pronounced shift to gas from coal until the latter half of the year given "abnormally high utility coal inventories." He believes the state of coal inventories, coupled with lower demand for gas-fired generation, will encourage a larger degree of coal usage in 2010.
"But with natural gas prices' trading below the coal-to-gas switching threshold currently and cold winter weather helping utilities to trim heavy coal stockpiles, we think that a reversal in coal-to-gas switching could possibly be deferred to later this year," Wolff said.
By the middle of the week ending March 19, the April NYMEX gas futures contract was trading in the mid-$4.40s/MMBtu, a level that Wolff said could trigger a small degree of utility switching to gas from coal.
Wolff estimated eastern coal prices in the week ending March 19 were trading between the equivalent of $4.50/MMBtu to $5/MMBtu range, while "eastern coal prices, net of transport and emissions, [were] running in the $4.50/MMBtu to $5/MMBtu range," on a gas-equivalent basis.
On the other hand, if international coal prices remain strong and tug up the price of Appalachian coal, dispatch costs of coal in the Northeast could increase and give gas the upper hand, analysts said.
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