Gas-fired power generators that enjoyed eating coal's cake last year will have the opportunity again next year as "there will be too much gas supply in 2011 not to boost displacement back to about 2009 levels, assuming normal weather next year," Barclays Capital analysts said in a note Tuesday.
"While gas price alone does not explain coal displacement...it is nevertheless a convenient tool in understanding that the amount of coal displaced is highly dependent on gas prices," they said.
Observed displacement of coal-fired generators starts when cash gas prices are at about $5.50/MMBtu at Henry Hub, the analysts said. Displacement begins to level off at about $4/MMBtu. "Power system constraints, not least of which is the amount of spare gas-fired capacity, provide upper limits on displacement," they noted.
Since the beginning of 2009 there has been coal displacement in almost every month, the analysts said, maintaining that displacement is not merely a summertime event when air conditioning load is high.
Coal displacement is substantial in the winter months, too, they said. "...[I]f displacement vanishes during the coming winter (e.g., if cash gas prices rise above $5.50), then more gas must be displaced in the subsequent summer months."
If eastern power markets cannot accommodate 3.5 Bcf/d of coal displacement next year, the displacement would spread to the Midwest and West "where gas would have to fall to very low price levels to be competitive with coal," they said. "Alternatively, producers could be forced to shut in gas production."
Analysts at Raymond James & Associates Inc. also are predicting increased coal displacement by gas in the power generation sector next year (see Daily GPI, Nov. 9). However, last summer analysts at Bentek Energy LLC said the level of coal-to-gas switching seen last year was essentially a fluke and won't be repeated anytime soon (see Daily GPI, Aug. 9).
Longer term, persistently low gas prices weigh on coal-fired generation operators when they are considering whether to upgrade plants to meet stricter emissions standards, the analysts said. "While many plants may be cost-effective to upgrade in a world of $6 or higher gas, the outlook is decidedly different in a $4 gas market," they said.
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