| | | Thanks for your thoughts que, very helpful.
Speaking of "good analyst reports" on coal to gas switching, the 1/22 Citi report shared by Dennis here offered some interesting insights about this. Given that, as shown by his two examples, CAPP coal starts to become competitive with natty at $4 prices, it seems safe to say that anyone who could switch to coal for power production has done so at this point. An excerpt from the report that includes the discussion on coal-gas switching follows:
Coal-gas switching already low
At the moment, elevated gas prices in the mid-$4/MMBtu range have significantly
reduced the size of coal-gas switching already. In fact, due to the structure of the
electricity supply-stack, prices are now skewed to the upside: at low gas prices,
there are more gas-fired power plants, even inefficient ones, that become economic
vs. coal plants, could run more and consume more gas; at high gas prices, there
are fewer gas plants that are efficient enough to compete with coal plants. If the
goal of high prices is to reduce demand further, then there are simply few gas plants
to make uneconomic at high gas prices.
This is how the situation works when gas prices rise from $3 to $4.
Case 1: At $3 gas, the marginal generation cost of a typical combined cycle gas
unit at 8-heat rate would be $24/MWh. At a coal price of $60/ton for Central
Appalachian coal, $20/ton transport, a heat content of 25MMBtu/ton and a heat rate
(fuel to electricity conversion) of 10MMBtu/MWh, the marginal cost of generation of
this typical coal unit would be $32/MWh.
Case 2: At $4 gas, the marginal generation cost of a generic gas power plant
becomes $32, roughly equivalent to this theoretical coal plant. Any signs of a hot
summer could push gas prices even higher because of stronger gas demand for
power generation.
But low northeast gas prices keeping gas demand somewhat elevated
Low gas prices in the Northeast also have the effect of strengthening gas demand,
even though high NYMEX and Henry Hub prices are supposed to reduce coal-togas
switching. Historically, Northeast gas prices were either higher than or flat to
Henry Hub prices down in the Gulf Coast. But looking ahead to spring and summer
later this year and beyond, forwards for certain Northeast gas price points have
fallen much below that of Henry Hub: current forwards are indicating that market
area prices, such as Texas Eastern Market Zone 3 (TETCO M3) representative of
the Mid-Atlantic region, would trade at a 50c discount to Henry Hub this coming
spring and summer. Prices are even lower in the heart of the production area in
Marcellus and Utica. Therefore, low prices should keep gas demand for power
generation relatively high in the region.
To reduce gas demand in the Northeast, Henry Hub prices may have to edge even
higher to pull up regional prices, or basis. However, as deliverability improves
within the Northeast but not out of the Northeast, cheap Marcellus gas could reach
market centers, such as Philadelphia, Baltimore-Washington and New York, more
easily. It might become a tug-of-war between high Henry Hub prices trying to pull
up Northeast market center prices (e.g. TETCO M3, Transco Zone 6 etc.) and low
Marcellus area prices dragging down these demand center prices. |
|
