Continuing low prices for natural gas could make it possible for the addition of anywhere from 2 Bcf/d to 10 Bcf/d in demand due to displacement of coal-fired power generation, various analysts have estimated.
“Actual displacement of coal is limited by a variety of factors, and thus we believe annual average coal displacement in the eastern power markets will be capped at about 5 Bcf/d on an annual average basis in 2012,” analysts Shiyang Wang and Michael Zenker Barclays Capital Markets said in a note to clients Tuesday. “The Midwest and Gulf states could contribute another 3 Bcf/d, followed by the West at 2 Bcf/d.
“However, the full 10 Bcf/d of coal displacement will not be needed to balance the gas market. Relative to 2008, we estimate coal displacement in 2012 to average 5.9 Bcf/d.”
The Southeast has seen significant displacement of coal since 2009, but “gas only recently has been competitive with coal” in portions of the Mid-Atlantic and Midwest, so displacement should spread across those regions this year, the Barclays’ analysts said.
The potential for coal displacement on first impressions “appears massive,” but that’s not the whole story, according to the analysts.
“If gas competed on price alone, and there were no operational constraints, gas would take 30 Bcf/d of demand away from coal at $2.50/MMBtu at the Henry Hub,” they said. “Clearly, the market is not facing an incremental 30 Bcf/d uptick in gas consumption this year, as a variety of operational constraints limit the amount of coal that is actually displaced in the market…the power system is not prepared for coal and gas-fired units to simply switch roles, even though their cash operating costs have done so.”
Adding in other factors, Tudor Pickering Holt analysts Brandon Blossman and George O’Leary came in at the low end of estimates, predicting utilities will use an additional 2 Bcf/d of natural gas in place of coal in their fuel mix this year.
“2012 is shaping up to be THE pivotal year for coal/gas competition,” Blossman and O’Leary wrote in a note to clients Monday. “Big increases in gas supply and gas-generation market share gains point to maxing-out both gas storage and the coal supply chain. We’ve forecasted a path that allows both markets to clear constraints via incremental coal/gas switching and a 10% drop in coal production.”
Regional transmission constraints and “the reality of a market full of long-term fixed delivery coal contracts” will limit the extent to which gas overtakes coal’s market share, according to Blossman and O’Leary.
“Contractual coal deliveries obligation plus limited resale options lead to storage capacity limits in the face of diminished run-time opportunities. The only remaining option prior to contract renegotiation is to burn the coal even if it is at a loss.’forced burns,'” they said.
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