In the midst of one of the hottest summers on record nationally, high natural gas demand in the electric generation sector continues to dominate U.S. energy markets, but how much of this continues when temperatures cool in the fall will depend on the relative price of gas to coal and economic dispatch decisions by grid operators, according to RBN Energy LLC's Sandy Fielden on the firm's daily blog on Wednesday.

In the midst of the all-time record July heat, Fielden noted that there was a two-day stretch in which gas and coal prices were in near equilibrium, but since that time (July 23) when gas prices edged slightly above coal, the gas prices have dropped and coal prices have risen to provide the spread between the two that has been evidenced most of this year.

Fielden called the experience a "close shave," noting that since July 24 gas prices have fallen 11% to $2.83/MMBtu and coal has risen 5% to $59.72/short ton. "Supply-demand fundamentals have provided support to natural gas prices all summer long in spite of major concerns about storage injection hitting the wall. Power burn during a record hot summer has reversed the damage a warm winter did to the storage surplus."

In answer to the rhetorical question of whether the high use of gas for power generation will continue, Fielden said RBN has looked at two indicators -- cooling degree days and relative cost of gas to coal. As long as the degree days for cooling stay high, both gas and coal will be called upon by grid operators to keep up with heavy air conditioning demand.

"As temperatures cool down this fall, system operators will have more generation capacity available to meet lower demand and can therefore choose which fuels to use for baseload generation," Fielden said. "It is at this point that the second of the two indicators -- plant fuel costs -- returns to the fore in determining power burn."

This underscores the fact that in times when there is a lot of excess generation capacity and demand for power is light, gas costs have to be less than coal for coal-to-gas switching to continue, the RBN analysis reiterated.

Despite an uptick in U.S. gas exports to Mexico where the demand for gas in the power sector is growing, the expected decrease in U.S. domestic power demand will mean a "surge" in gas storage again in the fall, Fielden said.

What Fielden called the "2012 Power Burn Sensation" will only continue in the fall if the coal-to-gas switching window stays open. If not, gas storage could fill up before the November start of the winter heating season.

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