The electric power generation sector's turn away from coal and toward natural gas is likely to be a gradual one over the next decade, according to a report from Moody's Investors Service.

"A sustained period of low natural gas prices makes natural gas the preferred fuel for generating electricity, economically trumping all other alternatives," said Jim Hempstead, Moody's Senior Vice President infrastructure finance group, and author of the report, "Shift in Electric Generation Mix Favors Natural Gas, Renewables at the Expense of Coal." The shift to gas is likely to be gradual because electric generation assets are capital-intensive and long-lived, and because utilities and regulatory authorities will seek to maintain a diversified generation mix, he said.

"From a credit perspective, the pace of change in the generation supply mix will also be gradual, leaving a reasonable amount of time for issuers to take proactive steps to revise their plans and mitigate the risks. We see the regulated and public power utilities as better positioned to adapt to these shifts than the unregulated power companies and merchant power projects," Hempstead said.

Total U.S. economic expansion will help to increase energy sales over the next decade, but improvements and a more aggressive deployment of energy efficiency will help keep the growth rate of total electric power volumes "modest," according to the report.

"Increased demand for natural gas generation supplies will raise prices at the margin, but will not be sufficient to rebalance the fundamentals behind natural gas production and demand," said Hempstead. "We think natural gas prices would need to reach approximately $7.00-8.00/Mcf before the sector will begin to aggressively switch back to other fuel sources."

Fuel switching "has largely run its course," Hempstead said. "Generation switching from coal to natural gas is limited by physical constraints, including growing coal piles at many plants."

But this is expected to be the fourth consecutive summer of coal-to-gas switching and the largest amount of switching yet, according to the Natural Gas Supply Association (NGSA) (see Daily GPI, June 6). Electric utilities are forecast to use 17% more natural gas, or about 3.9 Bcf/d, this summer than a year ago because of coal-to-gas switching on low gas prices, according to a recent outlook by NGSA. Electric utilities should double the amount of switching from coal to gas-fired power plants compared with a year ago, which would account for 6.1 Bcf/d of gas versus last summer's 2.9 Bcf/d.

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