Coal producers took a powder in the power generation game during the first half of the year as low-priced natural gas swooped in and captured market share, but an economic recovery could turn the tables again, according to analysts.
"...[T]he math suggests that U.S. natural gas demand is running about 211 Bcf higher through June than it otherwise might have if not for coal-to-gas switching. This equates to just over 1.2 Bcf/d over the first six months of the year," Raymond James & Associates Inc. analysts wrote in a research note last Monday.
But the picture could have been brighter for gas had hydroelectric generation not acted as a spoiler, they pointed out. Hydroelectric growth of 7.2% over the year-ago period in the context of a 5% decline in overall power demand likely worked against gas-fired generators. Without the mitigating effect of hydropower on gas-fired generation demand growth, gas could have enjoyed a 1.9 Bcf/d year-over-year hike, Raymond James said.
If so much coal-fired power generation hadn't been bowing out to make room for gas-fired plants so far this year, the current gas supply glut would be a lot worse, according to analysts at Barclays Capital. They conceded in a research note last Tuesday that coal-fired generation displacement has been much greater than they had thought it would be. "...[A]bsent the displacement of coal-fired plants, year-to-date gas demand for the power sector would have been 3.7 Bcf/d lower than levels last year," the analysts wrote. "The record storage inventory that we expect for October 2009 would have amounted to record shut-ins of gas production had coal not been turned down in favor of gas-burning plants."
As natural gas prices "should continue to deteriorate through the summer injection season (ending Oct. 31), this benefit [to gas-fired power demand] is likely to grow further before reversing course under a different relative pricing outlook heading into 2010," the Raymond James analysts wrote. In other words, "...the switching that helped gas demand this year may hurt it next year...[W]e find that our 2010 relative pricing outlook should drive most if not all of the price-driven switching between coal and natural gas back to coal for the full year."
The Raymond James analysts said they figure that gas demand from power generators could fall by about 0.85 Bcf/d next year (excluding effects from hydropower) as the U.S. economy recovers. The Energy Information Administration recently expressed a similar view (see NGI, Sept. 14).
"Sustained displacement of coal at 2009 levels would require that gas remain below $4/MMBtu in 2010," the Barclays team wrote.
Going forward, power industry players will look back on 2009 and the lessons learned about what can happen when gas is really cheap.
"That our estimate [of coal-to-gas switching] was low suggests that there is much more flexibility within these [coal] contracts, or more flexibility conceded by coal suppliers than anticipated," the Barclays analysts wrote. "Certainly, with persistently low gas prices, coal buyers are seeking accommodations from suppliers...2009 will set an important high-water mark for the power industry's reaction to cheap gas. New lessons were learned, and new flexibility was found in coal deliveries."
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