When natural gas prices retreated from a peak in May 2003 there were signs that “switching-capable” industrial customers were returning to natural gas, according to Raymond James’ latest “Stat of the Week.” And, along with falling gas prices, the rise in price of emissions credits likely will give industrial consumers even more incentive to switch to gas.

In a report on how emissions credits are now impacting oil-to-gas fuel switching, analyst Wayne Andrews noted that when gas prices began to rise early this year, generators and industrial consumers capable of switching from gas to fuel oil had an economic incentive to burn higher polluting residential fuel oils because the price for emission credits were low.

Environmental regulations that limit the total amount of emissions require certain industrial consumers — those required to comply with Clean Air Act regulations — to purchase credits from available sources so that they can emit more pollution. Lower-priced emission credits offer no incentives for users to switch to cleaner burning fuels like natural gas, and the price of emissions credits, said Andrews, has a “close correlation” with the spread between natural gas prices and residual fuel oil.

However, the price of emissions credits began to rise as gas prices fell, which “represented a clear sign that industrial and power generation consumers were switching back to gas,” Andrews said. “The data also indicates that the high cost of emissions credits may have forced some consumers to switch long before fuel oil and natural gas Btu parity was reached in July. This lends additional support to our belief that, as more gas demand destruction is required, the switching ratio between oil and natural gas will tend to decline below Btu parity.”

Andrews said that the supply of credits on the U.S. market is expected to fall again in the near future. “Basic laws of supply and demand suggest that, everything else being equal, the NOx price should rise, further increasing the financial incentive to switch to natural gas.”

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