What its executives are calling a “significant rally” of Eastern coal prices could fuel an upswing in the wholesale market for natural gas-fired electricity beginning next year, according to Calpine Corp. officials responding to questions from financial analysts Thursday.

Noting that coal prices have traded as high as $50/ton on the spot market and around an average of $45/ton overall last year, Paul Posoli, senior vice president for Calpine Energy Services, said that coal prices “drive power prices in many of the U. S. markets — especially in the off-peak times. We have seen some decent movement in some of the off-peak power prices in a lot of the markets with this run-up in coal.

“Right now there is not so much a ‘gas factor’ in the market as a coal influence. Keep in mind that this summer there will be ten states added to the state implementation plan for emission reductions. The combination of coal prices and emission reduction credits cause combined-cycle gas-fired plants to start looking competitive compared to coal.”

In a report released the same time Calpine officials were speaking in their earnings conference call Thursday, Standard & Poor’s Ratings Services said coal-fired generation could have newly revived attractiveness given the persistent high and volatile wholesale natural gas prices. S&P sees high reserve margins and heavy saturation of new natural gas-fired plants causing many more coal-fired plants to be built or under construction by 2010.

However, Calpine’s Posoli said running the rough, back-of-the-envelope calculations, assuming $50/ton coal and high (12,000) heat-rate steam turbine coal units equates to the mid-$20 range for variable power costs. “If you add O&M and $5 or $6 for emission credits, you’re up in the low $30/MWh, and a relative low (7,000) heat rate combined-cycle plant with $5 gas produces power in the mid-$30s/MWh range,” Posoli said, “So it is going to be close.”

He thinks that capacity factors in gas-fired plants will begin to increase over the next 12 months, making them more competitive.

The outlook for the continuing depressed spark spreads (cost of gas-vs.-wholesale power prices) and a dampened wholesale electricity market, according to Calpine, is not expected to change much until 2005. There will be a “continued weakness” in 2004, except for places outside the United States, such as Canada and the U.K. The economy and coal prices are the two factors to watch, Posoli said. “Ultimately, the economy is going to drive demand and prices.”

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