Coal Battered Early, Later Rebounds

Courtesy: TVA

For the first time, U.S. generation from coal and natural gas was equal in 2012, although just momentarily. Gas dominated early in the year, but as gas prices rose in response to supply and demand forces, coal use rebounded. Expect more of the same give-and-take in 2013.

The U.S. coal-fired power generation industry is facing formidable obstacles to growth—something it has long taken for granted.

Most frequently cited is the Environmental Protection Agency (EPA) promulgating regulations that require expensive capital improvements that make the economics of continued operation of existing plants problematic and make the building of new plants unlikely for the foreseeable future. Another formidable opponent is historically low natural gas prices that have pushed coal-fired generation lower in dispatch order in some regions. As a consequence of those low gas prices, reduced coal plant operating hours and unit cycling drive up the cost of electricity production from coal—hitting it where it has historically been strong. In response, some coal-based utilities are searching for that operating “sweet spot” that is a mix of coal- and gas-fired plants (in unique proportions), while others have decided to permanently make the switch from coal to gas.

Musical Chairs for Dispatch Orders

Natural gas–fired generation set the dispatch order on its head starting a year ago, when winter failed to arrive and gas prices plunged. But gas began giving up market share to coal during the third quarter, as rising prices and summer demand eroded at least some of the economic case for coal-to-gas switching.

Natural gas, meanwhile, increased its market share from 21.4% in 2008 to 30.6% last year. The data make clear that the largest shift in market share took place last year, though the EIA anticipates coal will regain in 2013 some of the market share it lost in 2012.

What’s more, coal-to-gas switching appears to have limits. For example, generation from natural gas at American Electric Power rose around 50% year-to-date, said CFO Brian X. Tierney during the company’s third-quarter earnings conference call. But Tierney said that with year-to-date capacity factors for many of the gas-fired plants in its eastern sector approaching 70%, and with the recent increases in forward natural gas prices, the ability for more coal-to-gas switching is minimal.

Switching for Profit

Coal-to-gas switching in 2013 seems unlikely to hit levels reached last spring when a warmer-than-normal winter led to a massive overhang of natural gas supply as record natural gas production pumped more supply into the market. Prices plunged as a result, making it economical for power plants from the East Coast to the Deep South to switch from coal to natural gas for power generation. Even coal produced from the historically low-cost Powder River Basin in Wyoming was displaced as far west as Wisconsin and Minnesota. In response, natural gas producers exercised market discipline and slowed development and production.

The Energy Information Administration (EIA) projected in November that higher natural gas prices will contribute to an 11.2% decline in natural gas consumption in the electric power sector for 2013. Even so, power sector consumption this year is still expected to be about 1.8 Bcf/d higher than in 2011. And new fossil-fired power generation assets—where they are being proposed at all—are almost exclusively designed to burn natural gas.

Each utility with significant coal-fired generation is looking for the most economic generation balance between coal and gas. For example, Michigan-based CMS Energy said that with seven of its coal plants mothballed in 2015 or 2016, and with MISO possibly increasing its reserve capacity requirement to 18%, the utility’s capacity shortfall could be as high as 1,500 MW. Its CEO, John G. Russell, said that natural gas likely will be the fuel of choice for the new capacity and that the company will decide this year whether or not to move forward on an $800 million capital investment for new capacity.

FirstEnergy also said it entered into a nonbinding memorandum of understanding with American Municipal Power (AMP) to develop 873 MW of peaking capacity at its Eastlake plant in Ohio. AMP would provide all of the construction financing and own 75%. FirstEnergy would buy the remaining 25% and would manage the project and operate the units. The facility would be operational in early 2016, and FirstEnergy would be bid into the 2016–2017 PJM-RPM (Reliability Pricing Model) auction scheduled for this coming May.

Independent power producers aren’t immune to unpredictable natural gas prices. Jack A. Fusco, CEO and president of Calpine, said that 2013 gas futures prices suggest some continued coal-to-gas switching in the East, but probably none at all in Texas. As a result, the strong showing by the company’s natural gas–fired generating assets in 2012 seems unlikely to be repeated this year.

1. Coal has competition. Coal for electric power generation is expected to regain some of the market share it gave up to natural gas in 2012. It’s clear, however, that for much of the past decade, natural gas has been clawing away at coal’s market dominance. Source: EIA, Short-Term Energy Outlook, November 2012.

Coal Markets Poised for Improvement

All totaled, coal use for power generation was on track to fall by around 120 million tons in 2012, according to Peabody Energy. Most of that decline—some 100 million tons—took place during the first half of the year, when natural gas enjoyed its greatest price competitiveness. Since then, natural gas prices have shown “robust” price increases, said Gregory Boyce, Peabody CEO. What’s more, below-average weekly gas storage injections, prompt gas prices above $3.50/MMBtu, and forward strip prices above $4 all were “favorable” for demand for Powder River Basin and Illinois Basin coal, he said (Figure 2).

2. Coal consumption rises. Domestic coal consumption used for power generation is expected to rebound in 2013, regaining almost half of the production lost in 2012. Source: EIA Short Term Energy Outlook, November 2012

John Eaves, president and CEO of Arch Coal, said a near-normal 2012–2013 winter could lead to a “sizable step down in coal stockpiles” and “meaningful gas-to-coal switching.” The St. Louis–based company remained cautious early in the fourth quarter, however, and planned to manage through a “potentially challenging” 2013. Next year and beyond, Arch expects an improvement in domestic coal markets. For one thing, Arch estimates that 45 GW of coal generating capacity could be retired by 2018. Much of that capacity represents the coal fleet’s smallest and least efficient units, which are already running at low levels. Eaves said those plants were on track to burn 40 million tons of coal in 2012, down from 75 million tons in 2010. “Any incremental negative impact from these potential coal plant retirements is likely to be modest,” he said.

Eaves said the lost consumption could be offset by rising utilization at the remaining 280 GW of installed coal-fueled capacity. “Collectively, the remaining coal plants are running below a 60% utilization rate,” he said in late October. “As U.S. power load grows, it’s reasonable to assume that the underutilized coal units could pick up that incremental burn lost from the retired plants.”

David Wagman is executive editor of POWER.