With natural gas production down and prices remaining at persistently high and volatile levels, coal may be on its way back into favor for U.S. power generation, according to a report by Standard & Poor’s (S&P).

The ratings agency noted that “practically” every region in the United States has a generating capacity surplus “that is well beyond the 15-17% capacity reserve margin expected,” and that imbalance is expected to persist well into the future. However, the capacity fuel mix could give rise to a preference for coal-fired generation.

“Given that most new construction is gas-fired generation, it is possible that there would be a need for such base load generation in many regions of the country around 2010 to 2013,” the report noted. “Otherwise, a significant proportion of energy would come from gas-fired plants that could raise the overall cost of electricity supply, or at a minimum, create undesirable price volatility.”

Assuming load growth of 2%, an end to the gas-fired construction cycle by 2007 and negligible retirements, S&P estimated that many coal-fired projects will be built or will be under development by 2010. Proposals indicate there are more than 44,000 MW of new coal capacity under consideration, and while S&P does not believe all will materialize, nearly 4,900 MW are either under construction or under advanced development, and another 11,000 MW are under early development.

“The ECAR and MAIN regions are expected still to have a surplus of base load generation as far out as 2010. However, new coal plants are expected to come on line in these regions because they export significant amounts of generation to the SPP, NPCC and MACC regions, all of which are forecast to require significant additional base load generation by about 2010.” S&P said that new coal generation would be supported “by the fact that a large proportion of the region’s generation is gas-based and coal will enjoy a significant economic advantage.”

The report noted that gas prices need to stay above $3.50/MMBtu, “although specific situations can still make a coal plant competitive at gas prices below that level. This price is a significant threshold because it is expected to be the price at which liquefied natural gas receiving and gasification terminals become viable.”

Because the United States is expected to import “increasingly larger amounts of natural gas, chiefly in the form of LNG, $3.50/MMBtu seems to be a good benchmark at which to measure the competitiveness of a proposed new coal plant. The significantly lower volatility of coal prices is an added benefit.”

For more information on the report, visit S&P’s RatingsDirect at www.standardandpoors.com.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.