Early indicators as of January point toward significant opportunities for coal-to-natural gas switching in the electric generation sector this year with gas prices estimated to stay in the $2.50-3.00/Mcf range, according to recent analyst notes. This situation will be particularly ripe in the East.

A Societe Generale analysis points to an “exceptionally high level of excess gas burn for power generation” as a direct result of the continuing low gas prices and availability of gas delivery capacity for the nation’s power generation sector. Analyst Laurent Key cited gas prices below $2.80 as allowing competition against Illinois Basin-fed coal-fired power plants for the first time since 2009.

Key said coal-to-gas switching is already up markedly for last month: 5.5 Bcf/d, compared with 4.25 Bcf/d in December and less than 1 Bcf/d (800 MMcf/d) in January 2010.

Calling for gas prices to bounce around in a range of $2.50-3.00, Morgan Stanley Research Global’s analysts said an underestimation of the coal-to-gas switching potential should create a floor for gas as part of a region-by-region analysis that concludes the switching opportunities will continue to be “substantial” with a lot of unused gas capacity remaining.

The switching from coal should provide more opportunities to avoid shutting in natural gas production due to low prices, Morgan Stanley concluded in its latest comments. Utilities analyst Stephen Byrd and coal analyst Wes Sconce jointly came to this conclusion.

They see both the Southeast and PJM Mid-Atlantic regions as ripe for the most switching, noting that the Southeast, which has the highest delivered coal costs nationally, should be “the best test case.” Even though PJM has some of the lowest delivered coal costs ($3.10-3.25/MMBtu), with $2.70 prices gas becomes “very competitive,” according to Byrd and Sconce.

“We expect to see material incremental gas-fired power demand coming from traditional Appalachian coal regions, which should help support gas prices,” they said.

And in the western half of the nation, including the Electric Reliability Council of Texas (ERCOT) and the Midwest, $2.50/MMBtu gas will compete against Powder River Basin (PRB) coal-fired generation plants on a dispatch cost basis. In those regions PRB coal is the predominant fuel choice for coal-fired plants. Morgan Stanley’s analysis uses PRB coal-fired plants in ERCOT as an example and concludes that $2.50 gas will compete.

“If prices fall all the way to $2/MMBtu, the majority of PRB gas capacity (including peakers) will be in the money, resulting in coal-to-gas switching demand that far exceeds our 5 Bcf/d-plus estimate for the entire United States at the $2.50 price estimate,” according to Morgan Stanley.

Separately, on Thursday an analysis by Bentek Energy said current $2.33 Henry Hub spot prices mean that approximately 3 Bcf/d of gas could replace Wyoming’s PRB coal as an alternative generation fuel strictly on a price-MMBtu basis. Bentek said its analysis concludes that gas becomes competitive with PRB coal when Henry Hub spot prices are below $3. At these prices, hypothetically 500,000 short tons of coal daily could be replaced by gas.

The only exception to the predictions for big-time switching potential is in the Northeast, where coal-fired generation capacity is limited.

By the latter part of this year gas prices could rise back to the $3/MMBtu level based on the strong coal-to-gas switching and a related production decline across the production basins, said Societe Generale’s analysis, which lowered its projection for average gas prices this year to the $2.40 level as of December-January, compared to a forecast of $2.90 in November.

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