You rang? :-) here's your idea already coming into place, in Europe.
With Appalachia coal at ~$135/ton, at what price point does electric generation begin switching over to NG?
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High coal prices favor European gas-fired power in near term
London (Platts)--17Jul2008
High coal prices and comparatively lower gas prices have made gas-fired
generation the more profitable pursuit for European power producers this
summer, an analysis of Platts data shows.
Indicated month-ahead profits for coal-fired generation in Germany have
switched to negative since the start of July, while in the UK gas-fired
generation has looked more profitable than coal-fired since the middle of
June.
The UK month-ahead 50% spark spread--the difference between the cost of
gas and the price of power for power plants with an efficiency of 50%--was
almost Eur20/MWh below the equivalent spread for coal--the dark spread--at the
start of the summer, April 1. But that difference has narrowed to just
Eur3.4/MWh as of July 15.
When the cost of carbon emissions is taken into account, the spread
between the spark and dark spreads reverses to favor gas. Coal-fired
generation produces about twice as much carbon dioxide as gas-fired, and so
requires twice as many EU emissions Allowances (EUAs) for the same amount of
power produced. The UK month-ahead clean spark spread was Eur38.75/MWh July
15, compared with a clean dark, or green, spread of only Eur25.82/MWh.
In Germany, the same process has resulted in the month-ahead green spread
moving into negative territory as of July 1, when it was negative Eur9.92/MWh.
At that time the clean spread was Eur6.15/MWh.
The reversal of the spreads should mean that generators should favor
gas-fired generation over coal-fired generation, although in practice only the
UK has the necessary flexibility to switch. That should mean that UK
month-ahead power prices have responded more to movements in the coal price
than the gas price, as coal would be the marginal fuel.
German gas-fired generation is relatively minimal, at only around 11.7%
of total capacity, although other forms of generation are available, namely
nuclear and renewables. If those forms of power can meet demand then German
producers would have a strong incentive to turn off all coal-fired generation,
sell fuel and EUAs, and buy wholesale power.
RISING COAL, STABLE GAS LED TO SPREAD REVERSAL
The reversal, seen across Europe, to spreads that favor gas-fired
generation has been due to a rising coal price and to summer gas prices
remaining somewhat stable.
Coal's benchmark API 2 CIF ARA month-ahead contract broke $200/mt for the
first time ever June 26 and has stayed above that level since. The contract
was at $206.65/mt July 15, up 65% since April 1.
In contrast, the UK NBP month-ahead gas contract has been below Eur30/MWh
for most of the summer, only breaking that level for a few days during the
first week of July, before dipping back down again. July 15 it was
Eur28.335/MWh, up only 14% since April 1.
The changed relationship between coal and gas has meant that EUA prices
have been easily high enough to encourage a shift in the UK toward the less
carbon-intensive fuel, gas.
At the start of the summer, the EUA price would have needed to be around
Eur30/EUA in order to make the clean and green spreads equal, and so
incentivize a shift. But the actual price at that time was under Eur20/EUA,
making coal-fired generation preferable.
However, in the middle of May, the required EUA price dropped
dramatically and came into line with the actual price of about Eur20/EUA. May
1, the required price fell below the actual price, and has remained below it
ever since, implying that the EUA price should be encouraging less coal-fired
generation.
In Germany, the shift came around the same time, although generators
would have had less ability to burn more gas and less coal. It should still
have encouraged generators to turn on all gas-fired generation, and to use
coal as the marginal fuel.
FORWARD PRICES FAVOR COAL
But while the near curve has seen gas-fired generation favored over
coal-fired generation, forward prices show a marked advantage for the latter.
The UK winter 2008 green spread has been more than double the clean
spread for most of the year so far. The German cal 2009 clean spread has been
negative for most of the summer, while the green spread has stayed positive.
Both spreads imply an incentive for generators to burn coal more than
gas, and indicate that EUA prices would have to rise to around Eur45/EUA to
encourage a shift towards gas.
The difference between the short-term and medium-term situations exists
because forward gas prices are much higher than nearer-dated contract prices.
High crude oil prices have pushed up forward gas prices, while summer gas
prices have been relatively weak in line with the lower demand generally seen
during the warmer months.
Coal prices are less seasonal, however, so the coal curve is relatively
flat, while global production issues have supported the front end.
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