While numerous factors affect natural gas prices, the price floor rests on coal; that is, the economics of coal-fired power generation relative to gas-fired plants, Barclays Capital analysts said in a recent note.

Gas prices are “rattling around” their floor, which is created by power sector demand that increases when gas prices fall. This serves to rebalance the market. While the dynamic might be hard to understand, the analysts said they believe it is strong enough this year to keep gas prices from falling far below $4/MMBtu for a sustained period.

“The gas price floor is created by the displacement of coal units in the eastern interconnect power market. This region alone has provided essentially all the coal displacement needed to balance the gas market,” the analysts said. “Basic math says that when it is cheaper to run a gas-fired unit instead of a coal unit, the market will do so.”

However, it’s not quite that simple because during high-demand periods “essentially all coal- and gas-fired units are operating,” leaving no opportunity for displacement. Additionally, some of the coal units have “must-run” status, and transmission constraints can affect the ability of power from a gas-fired unit in one region to displace power from a coal-fired unit in another, Barclays said.

In predicting the market, analysts face the risk of correctly assessing power loads but missing the share served by gas-fired plants, Barclays said. “…[W]hen [natural gas] storage injections fall short of market expectations as a result of increased power demand for gas, it is often because gas demand from the power sector was higher than that suggested by forecast power loads alone,” the analysts said.

Coal-fired power plant dispatch decisions are made by operators on a weekly basis, the analysts noted. Operators compare costs of company-owned units and those with whom they have contracts, as well as the cost of purchased power. “A gaggle of other factors land in the mix, but that is the basic task,” Barclays said. “Note that this is not fuel-switching; few coal units can run on straight natural gas.”

The power generation sector’s reliance on gas-fired units is slated to increase as operators increasingly rely on gas, thanks to its low price and ability to help them meet emissions reduction goals (see Daily GPI, Aug. 30; related story).

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