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Coal-to-gas switch in US Southeast driven by price, new builds through 2015

By Samantha Santa Maria in Houston, Chang Noh in Washington

May 11, 2012 - The Southeast, the top power-consuming region in the US and the leader in coal-to-gas switching, is poised to become a gas-on-gas battleground as Marcellus producers aim to win market share from other shale basins and traditional Gulf supplies.

The trends that make region the prime target of gas producers and pipelines are set to continue, Platts analysis shows, and plans to increase gas supply through a host of new pipeline builds and expansions are likely warranted. (See related map: US Southeastern gas pipeline expansions)

Compounding the expected demand uptick are wide gas vs. coal generation margins, with historically low-priced gas remaining far more profitable over coal plants that burn Central Appalachia (CAPP) coal, which dominate the generation space in the Southeast.

Coal companies have been feeling the tremendous pinch of low gas prices for several months.

Analysis continues below...

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Alpha Natural Resources president Paul Vining, in the company's first-quarter earnings call, related the current day-to-day dynamic. "Customer calls us, they want to defer 500,000 tons," he said.

"We say 'No thanks, you need to take the coal.' Discussion ensues, trader comes along, buys the coal from them, puts it on some existing business they have overseas where they have taken a short, and they dispatch gas and everybody comes out ahead," Vining added.

Regional gas still loses out to low-sulfur Powder River Basin coal-fired plants through 2015, but these are already a minimal presence in the region's generation mix in the region due to high transportation costs, despite the relatively low price between the fuel itself, Platts analysis indicated.

Of the overall coal-fired generation capacity in the Southeast, PRB-burning plants account for less than 1%, according to data from Platts unit Bentek Energy.

Even with PRB coal trading at less than $10 per short ton, it is not seen as a realistic option in the Southeast.

Sean Murphy, vice president of fuels and emissions at GenOn, said, "The opportunities for PRB conversion are limited at best. The biggest obstacle is money -- even if you can lower your fuel costs, the fact is coal plants are making no money right now. When you consider the capital for conversion -- all plants will have to spend some money to convert -- the numbers don't work."

Prices for CAPP coal burned by generators in the Southeast have fallen from a near-term high of $79.75/st on June 8, 2011, to $59.10/st as of May 9, 2012, Platts prices show.

But that 26% decline has not lessened the pressure on coal-burning generators because remarkably low electricity prices from cheap gas continue to pressure margins for electricity sellers, particularly those not taking advantage of cheap gas.

So far this year the average on-peak next-day electricity price for the Southern Company control area in the middle of the Southeast is $26.27 per megawatt hour, according to Platts price data, down 33% from the comparable 2011 price of $39.35/MWh, and 61% below the comparable price for the same period in 2008 of $67.41/MWh. (See related chart: Into Southern Peak TDt: Jan 2, 2008 - May 8, 2012)

The Southeast receives between 43% (Mississippi) and 93% (North Carolina) of its coal supplies from West Virginia and Kentucky, according to Energy Information Administration data from 2011.

Alabama is a slight anomaly, receiving about 13% of its coal receipts from these two states, as 48% of its coal comes from the state itself, classified by EIA as southern Appalachia.

Currently, the Southeast is consuming about 6.2 Bcf/d of gas for power generation for the year-to-date, Bentek data shows, up 26.5% from 4.9 Bcf/d last year.

The largest consuming states are Florida (2.8 Bcf/d), Alabama (893,000 Mcf/d), Mississippi (781,000 Mcf/d) and Georgia (439,600 Mcf/d). Pulling up the rear are Tennessee (137,000 Mcf/d), South Carolina (244,000 Mcf/d) and North Carolina (285,900 Mcf/d), according to Bentek data.

In contrast, coal receipts in the first two months of the year have been largely in decline in the region.

According to preliminary EIA data, bituminous coal receipts in Florida totaled 2.8 million st in the first two months of 2012, down 8% year-over-year.

Alabama is down 21.5% to 931,000 st over the same period. Mississippi was up 4.6% to 427,908 st, Georgia was down more than 32% to 2 million st, Tennessee dropped 70% to 732,297 st, South Carolina was down 9.3% to 1.7 million st and North Carolina was down 26.3% to 3.5 million st.

Next page: Trend of more gas, less coal into US Southeast set to continue

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