Noting that the economic indicators driving electricity demand growth were all up in the second quarter, an executive with San Jose, CA-based Calpine Corp. told financial analysts Thursday that coal operators are likely to have to buy more power on the open market in the near-term to hedge increased competitive pressures on coal-fired power.

The alternative to going into the wholesale power market more in the off-peak times is operating plants at a loss for many coal-fired generation facility operators, said Paul Posoli, Calpine’s senior vice president for energy services.

“Maybe I am beating this issue too much, but the factor of coal and emission costs” could provide greater demand for natural gas-fired power plants, which are what Calpine specializes in developing and operating, said Posoli. In the past three months “SO-2 credits (sulfur dioxide) jumped from $290-per-ton to more than $600, and they’ve settled at about $500-per-ton, while NOx (nitrogen oxide) credits are up to $2,500-per-ton.

“When you look at that in dollars-per-megawatt-hour, you’re up to close to $10-per-MWh for emissions at these coal plants that are burning central Appalachian coal. All-in coal-fired generation in the Eastern Interconnect (part of the grid) is looking at a $40 variable cost.”

This means that his prediction of a year ago that coal-fired generation would “trend toward the cost of combined-cycle” natural gas-fired generation supplies has happened, Posoli said. “We’re there, all-in variable costs are right at the same level as combined-cycle.”

Posoli said this won’t change the market right away, but “it seems inevitable” that coal generators over time have “to realize they are better off buying in the market – especially in the off-peak and the shoulder periods – than running their plants at a loss.”

He added that he thinks the coal operators are also operating with what he concluded are “very low inventory levels,” meaning that going into the so-called “shoulder season,” they have to decide — as plant operators do continually — whether to run their plants or buy on the open wholesale market.

Continuing to run some plants may mean “risking running out of coal,” Posoli said. Right now, all this means it “doesn’t make economic sense to build a new coal plant in the Eastern half of the United States.”

As part of a conference call with financial analysts to announce quarterly earnings, which showed a larger loss than losses reported the same quarter last year, Calpine executives announced the company has started a five-year program to shave $1 billion in its ballooning operating/maintenance costs in its fleet of power plants that is expected to top 30,000 MW over that period.

The favorable economic indicators in the second quarter that Calpine’s executives cited as bidding favorably for merchant power demand are increases during the three-month period in: (a) residential investment (15%), (b) information technology (14%), and (c) capital expenditures (13%).

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