Lower Natural-Gas Price Leaves Coal Out in Cold
online.wsj.com
* JUNE 15, 2009
By REBECCA SMITH and BEN CASSELMAN
A precipitous drop in the price of natural gas means lower bills for some electricity consumers but spells trouble for coal producers, long the dominant source of fuel for the electric-power industry.
Abundant new supplies of natural gas, combined with reduced demand for electricity, have sent prices tumbling to less than $4 per million British thermal units from more than $13 last July. That drop could prompt power companies to invest billions of dollars in natural-gas fired plants.
"Nobody was talking about $3 gas a year ago," said James Daly, director of gas and energy supply for Nstar, the utility formerly known as Boston Edison. Nstar is cutting residential electricity rates 27% on July 1 and anticipates a similar reduction in January, if gas prices remain low. Gas is the primary generating fuel in New England.
 Associated Press
Coal has produced the biggest share of U.S. electricity for more than a century. Above, a train car filled with coal heads to Paducah, Ky., in May.
For more than a century, the U.S. has relied on coal to produce the biggest share of its electricity. Coal now accounts for about half of the nation's electricity, compared with about 21% from natural gas.
But natural-gas plants can be built more quickly and inexpensively than coal plants, and they release about half as much carbon dioxide as coal to produce similar amounts of electricity. That could be a big advantage if Congress passes a climate-change bill that would cap such carbon emissions.
This isn't the first time the power industry has embraced natural gas. In the late 1990s, as states deregulated their electricity markets, a new breed of so-called merchant generators built scores of gas-fired plants, encouraged by rosy supply forecasts and easy borrowing.
Enthusiasm waned by 2002, when such merchant generators as Calpine Corp., Mirant Corp. and NRG Energy Inc., landed in bankruptcy court. Gas prices also began to rise sharply around 2007, following the run-up in oil.
New natural-gas discoveries, however, in Texas, Louisiana, Pennsylvania and elsewhere, have created a gas glut that analysts expect to linger. Energy consulting firm Wood Mackenzie predicts gas prices won't recover until 2015.
Power companies are beginning to ratchet back investments in coal-generated plants to take advantage of low gas prices and hedge against costly climate-change legislation.
"We're pulling back the coal throttle," said Ted Craver, chief executive of Edison International, Rosemead, Calif., which owns several coal-fired plants that sell power on the open market. With sales poor, his company took units out of service early for seasonal repairs this year, hoping sales will pick up this summer.
In parts of the U.S. where there are daily electricity auctions, gas generators are chipping away at coal market share with lower prices. Coal-to-gas switching has created incremental gas demand of three billion cubic feet a day, and "further switching potential is still large, in our view," said a research report released June 1 by Merrill Lynch & Co.
"Fuel switching aggravates a situation that's already bad for coal," said Shneur Gershuni, analyst at UBS Investment Research.Coal consumption by the U.S. power industry is expected to drop by 2.3% this year, according to the Department of Energy's Energy Information Administration, and coal production by mining companies is expected to drop 5% to 10%.
"There basically is no spot market for coal right now," adds Jim Thompson, managing editor of the Coal and Energy Price Report in Knoxville, Tenn., a coal-industry newsletter. "Coal companies are living off their utility contracts."
Utilities mostly obtain coal through multiyear contracts. As a result, even though spot coal prices have fallen, prices paid by utilities are expected to rise 2% this year to an average of $2.11 per million BTUs. Next year, the EIA expects coal prices to dip slightly to an average of $1.91 per million BTUs.
Those numbers suggest coal is still about half the price of natural gas. But the numbers can deceive. Gas-fired power plants convert fuel into electricity more efficiently than coal units, and it is cheaper to move natural gas than coal. As a result, gas can still have an advantage over coal even if the commodity cost is higher.
Write to Rebecca Smith at rebecca.smith@wsj.com and Ben Casselman at ben.casselman@wsj.com
Message 25716160 |
