Dave's Energy

Thursday, March 29, 2012

Switching from Coal to Natural Gas: Will It Impact Natural Gas Prices Near Term?

With historically low natural gas prices today, the argument continues to go that low prices will self-correct. My prior post "Explaining the Disparity Between Oil and Natural Gas Prices" discussed the supply side of things and why gas prices won't rise simply due to price-based changes in supply.

Most industry professionals and natural gas producers will tell you that they themselves only see prices rising once we have a significant demand response to low prices. My prior post discussed some of the reasons that fuel switching was no longer as big a deal as it may have been historically. But the main long-term demand response (fuel switching) that can, and will occur, is the displacement of coal fired electric generation capacity with natural gas fired capacity. This is nothing new. It was the standard future view back in the late 1990's early 2000's when gas was last at this low price range of $2-$3/MCF (mmbtu). But, when gas demand outpaced supply, prices went up in the 2003-2008 period and the conversations all started to shift to renewable energy (solar, wind). Now with low gas prices and ample supply we are again back to gas as a "bridge" (albeit a long one) to a more renewable future. The question then becomes whether switching to gas from coal will have a significant near-term 1-3 year impact on natural gas prices. I will contend the answer is no.

First note that moving to gas from coal is not really "fuel switching" - that is, the power producer doesn't just change the fuel in the plant, they build a new natural gas plant and retire or reduce the use of the old coal plant. For this reason, it doesn't happen quickly and therefore doesn't have a rapid-demand-response impact on pricing.

So let's take a look at how much additional gas demand might come from the current plans for building new plants and how much might come with a big push to retire old coal plants.

First off, here is a chart that shows the existing electric generation capacity in the United States, by fuel type. All data is from the Energy Information Administration (www.eia.gov):

Note that although we have more natural gas capacity than coal, we generate more electricity from coal (see chart below), because those plants are typically "base-load" capacity (run continuously) while many gas plants are used to generate peak power(intermittently turned on to meet peak power needs). The chart below also shows the historic rise in natural gas as part of our mix, and the drop off in coal during the most recent economic downturn. Natural gas has increased through both high and low price environments, because it is a better fuel (cleaner, more efficient). With low prices for the foreseeable future, that market share increase can improve even more. And with potential carbon legislation, gas will be significantly favored over carbon-heavy coal.

Now here is a table showing all the planned electric generation capacity additions (as of Nov 2011) through 2015:

Based on the planned additions, the electric generation mix is not expected to change much through 2015. Natural gas will add 37,718,000 MW of capacity, which is 8.1% growth over the existing 467,214,000 MW of existing capacity. Coal grows 2% while wind grows 39% and solar would grow a whopping 840%. When all is done, however, solar is still less than one percent of all generation, and natural gas only moves from 41% to 41.5% while coal drops from 30.1% to 29%.

So how much more natural gas demand might come from that 8.1% increase in capacity? Well, existing gas demand in 2011 for electric generation was 7,600 Trillion Cubic feet (TCF), or approximately 20.8 BCF per day. Simply, let's assume an 8.1% increase to that, and we'd be using an additional 1.6 BCF per day by 2015. The number would likely be higher, because the new capacity may be more fully utilized than existing capacity, which includes a lot of "peak" plants. So let's assume a number more like 3 BCF per day additional demand from electric generation. That's a meaningful amount of gas, but compare that number to the continued growth in production as discussed in my prior post:

You can see that 3 BCF of additional demand isn't going to make enough of a difference, given that we are producing 10 BCF more each day than we were just a few years ago.

The holy grail of changes to gas demand would come from retiring much of our aging coal plants infrastructure with gas plants. Below is a "heat map" from Platt's (McGraw-Hill) showing that much of our existing coal capacity is from plants over 40 years old.

If we retired a quarter of the oldest plants in the U.S., and replaced them with gas at a level that represented about 10% of our electricity mix, that would likely increase gas demand by an aggregate of close to 10 BCF. That would have a meaningful impact on gas prices, and would generate a significant improvement in our emissions profile. But even with a move up in prices, let's say back to a normalized $6/MCF, gas prices are still attractive to the power generator(demand). They also then become more attractive to the gas producer (supply), and we would see even more supply being developed. So we shouldn't fear higher gas prices...that is what would make the move to natural gas a sustainable one.

How soon can we make a move like this? I contend not in the 1-3 year time frame. But to some extent that is dependent upon how much of the excess gas plant "peaker" capacity could be re-purposed for baseline usage and how much new capacity would have to get built - starting right now.

Labels: , , , , , ,


Post a Comment

Links to this post:

Create a Link

<< Home