Switching from coal- to gas-fired power generation has been more modest than many market watchers believe due to a variety of factors that distort the picture; however, in the years ahead, gas will continue to gain share in the power generation market as more gas-fired plants are built, according to an analysis by FBR Capital Markets.
"In our view, new gas build, an increase in renewable generation and unusual weather patterns distorted the true switching picture over the last three years, causing analysts to inflate their figures. In reality, switching was fairly limited," FBR analysts said in a note last week. In the future, the 2008 vintage fleet of gas-fired generators could account for an additional 1 Bcf/d of gas demand (equivalent to 25 metric tons of coal) in a $3/MMBtu gas environment. In a $2/MMBtu gas world, these same generators could represent 2 Bcf/d in additional demand (equivalent to 50 metric tons of coal), FBR said.
"Based on the unseasonably warm winter so far this year and the current gas strip, our estimate for 2012 is an incremental 1.5 Bcf/d of switching (40 metric tons of coal) from 2011," the firm said. "These figures are significantly below consensus, which likely under-appreciates the multitude of limitations to switching." These include power plant locations, coal supply contracting issues and pipeline constraints, among others.
Declines in coal-fired generation utilization in the past were not entirely due to existing natural gas-fired plants capturing more of the demand. "The coal output was also cannibalized by new gas capacity additions and renewable generation. For gas aficionados, we identify approximately 1 Bcf/d to 1.5 Bcf/d from net coal-to-gas switching and 1.5 Bcf/d from new gas builds since 2008 (about 3 Bcf/d total)," the analysts said, noting that the U.S. gas-fired generation fleet consumed about 21 Bcf/d in 2011.
They also said gas-on-gas switching has taken place in the past, so they only focus on net gas-switching numbers. New gas-fired plants have pushed out older, less-efficient ones. "This is a trend to watch because we are hearing from some suppliers that highly efficient gas plants are in the works," the analysts said.
Going forward gas will play a growing role in power generation as new gas-fired plants are built. Even though the current gas-fired fleet remains underutilized, new plants will be needed, FBR said. "Coal generation retirements from EPA [Environmental Protection Agency] regulation could require additional gas builds because these retirements seem to have a disproportionate impact on demand-responsive, mid-merit coal plants. We see gas generation builds that were trending at 9 gigawatts per year increase to at least 12 gigawatts a year through 2018. Overall, we expect the industry to add 70 gigawatts of CCGT [combined-cycle gas turbine] and 16 gigawatts of other gas capacity between now and 2018, contributing roughly 6.5 Bcf/d in eventual gas demand."
By 2015, the FBR analysts said 30% of the U.S. power generation mix will come from gas-fired plants, compared with 25% in 2011 and 20% in 2006. "This could eventually boost natural gas prices. We expect coal to drop to 36% of the mix by 2015 from 42% in 2011 and 49% in 2006, a secular headwind for coal companies."
The analysts said not everyone is convinced that gas supplies will remain abundant and inexpensive going forward. Industrial consumers of gas "have been scarred by decades of uneven policy corresponding to wild fluctuations in natural gas prices and availability," the analysts said. "Likewise, utilities tend to be much more cautious than many investors assume when making price and rate assumptions for plants that can have lives between 20 and 50 years."
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