Rising coal prices are unlikely to result in a greater reliance on gas-fired power generation, which would pressure gas prices even higher, a report by consulting firm Wood Mackenzie concludes.

New research by Wood Mackenzie finds that rising spot Central Appalachian coal (CAPP) prices, which have essentially doubled over the past six months from $30/ton to more than $60/ton, will not lead to a meaningful increase in demand or gas prices in the already tight market. The report titled “Coal Displacement Fears Overblown,” found that the number coal-fired generation units at risk is too small to impact the market for natural gas.

Even the high-priced coal is still less than $2.50/MMBtu, compared to $6/MMBtu for spot natural gas, and few companies are paying those high coal prices. Some companies do have to buy emissions credits, which drives costs higher. NOx credits cost about $3,600/ton for 2005 and that could add $5-15 to the cost per megawatt hour at a unit depending upon what type of emission control technology they have. Sulfur costs next year are running about $480/ton, which would add a couple additional dollars in emissions costs. But only in a handful of cases would those emissions costs close the gap between coal costs and gas prices, said Joseph Sannicandro, vice president of North American power research at Wood Mackenzie.

“If you have someone who is in the market for this expensive Central Appalachian coal and is in the market for spot emissions purchases and are operating inefficient coal plants, then you are seeing the situation where the cost of that coal unit is very comparable to the cost of a new combined cycle gas unit buying spot gas,” said Sannicandro. “That’s where the theory that you are going to get a big impact on gas markets breaks down.

“When you start trying to narrow down how much capacity truly meets these criteria you are going from the 300,000 MW of coal generation in the United States down to something between 3,000 and 7,000 MW of coal generation that potentially fits this criteria,” he said.

In fact, out of the total 300,000 MW of coal-fired generation only about 3,700 MW fit the criteria required for an impact on the gas market, Wood Mackenzie said.

“First we looked at coal plants that are inefficient, that have a high heat rate, and that gets us down to about 15,000 MW having a heat rate of above 12,500,” said Sannicandro. “Then we looked at those units that are potentially receiving Central Appalachian coal…and that narrowed it down a couple thousand megawatts. Then we looked at their historical fuel prices, and those that had been paying less than $1.25/MMBtu historically we assumed were on long term contracts, which is the case for most of the coal in the U.S. — estimates of spot coal purchases range from about 10 to 20% of total coal consumption,” he said.

On top of that, you have to look only at those units that do not have emissions controls — if they have controls then they are reducing emissions and reducing the likelihood that they need to go into the market for emission credits.

As a result, the concerns of companies about the impact of high coal prices on natural gas prices are overblown. “What we are concluding here is that when you look at the units that fit this criteria and look at how they have operated historically (utilization of about 40%) and convert that into gas equivalent, it comes down to about 250 MMcf/d and that compares to a total power sector demand of about 13 Bcf/d,” said Sannicandro.

“What we’ve found is that, in essence, the market has been overreacting to coal prices. We believe that, despite what some reports say, companies do not need to go out and contract for extra gas supplies. Our independent research analysis tells us that recent coal price increases will not have any substantial impact on the already tight market for natural gas.”

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