Gas closes in on coal in power plant generation 

Source: Peter Behr, E&E reporter • Posted: Thursday, May 14, 2015

For the first time in three years, natural gas is about to catch up with coal as a fuel for the nation’s power plants, foreshadowing the crucial role of gas supplies in meeting U.S. EPA’s proposed Clean Power Plan.

Natural gas prices below $3 per million British thermal units (MMBtu) have created the closest convergence of the two power plant fuels since April 2012, the Energy Information Administration’s Short-Term Energy Analysis reported yesterday. And the dead heat that April was the only other time that has ever happened, noted EIA, an arm of the Department of Energy.

“There are a lot of different factors” contributing to the pickup in gas use, said EIA energy economist Tyler Hodges. Some coal plants have closed in response to EPA’s regulations on toxic power plant emissions, or in anticipation of the CPP, EIA said. Coal plant operators often do maintenance projects in the spring, taking plants offline, which opens a door for more gas plant dispatch, Hodges added.

“Primarily the main one is the low natural gas prices. That’s been driving down the share of generation fueled by coal and pushing up the gas share,” he said.

Coal’s share of power plant fuel supply was 43 percent during the first two months of 2014 but has fallen to 37 percent in this year’s opening two months, while natural gas generation has climbed from 24 percent to 28 percent in that period. The gap will be virtually closed before this summer, EIA said.

The competition between the two hydrocarbon cousins can be close, because both kinds of plants have surplus generation capacity except in periods of heavy demand. Generally, coal is in the driver’s seat, and its share rises when gas prices climb above $3.50 to $4 per MMBtu and coal prices are constant. Gas recoups with a price below $3 MMBtu, analysts note. The gas price at the Henry Hub terminal point in Louisiana has dropped from $4.66 per MMBtu in April a year ago to $2.61 MMBtu this April, EIA said.

But the playing field will be tilted by the Clean Power Plan, which aims to cut carbon dioxide emissions from power plants 30 percent by 2030. Coupled with the EPA toxics rule, the CPP will drive down coal generation in favor of gas, which discharges half of the carbon dioxide that gas plants produce for the same amount of energy, analysts agree. The unknown is by how much.

Gerry Cauley, president and CEO of the North American Electric Reliability Corp., said last week that his organization’s latest analysis points to “a tremendous shift on the energy side to a dependence on gas.” Speaking at a review of CPP compliance strategies sponsored by the Bipartisan Policy Center, Cauley said that shift brings with it the risk that the gas pipeline and storage infrastructure may not be adequate to deal with peak periods of demands on the gas system.

Long-term pricing game

Advocates for renewable power and energy efficiency measures say gas dominance isn’t foreordained. There is more flexibility and potential resources than grimmer forecasts provide, they say.

EIA’s short-term forecast has gas prices rising only gradually through the balance of this year and next, remaining well below $4 per 1 MMBtu at the end of 2016.

What happens in the long term will have a significant impact on the future for gas prices and generation, however, a Bipartisan Policy Center analysis last week noted.

In its “high gas price” scenario, the spot gas price is 11 percent higher than in a midpoint base case in 2020, and 15 percent higher in 2030. The “low gas price” outlook leaves gas spot prices 17 percent lower than the base case in 2020 and 14 percent lower in 2030.

Looking at the 2020-2030 period when the CPP would be in effect, the center’s analysis predicts that a price of $6 to $7 per MMBtu would cause renewable energy output to jump by 9 percent, compared with a gas price in the $5-$6 range. Coal output would rise 6 percent, and gas would fall 13 percent.

If gas prices remain on the low side, between $4 and $5 per MMBtu, renewable energy would fall off by 5 percent and coal generation by 4 percent, while gas generation would jump 9 percent compared with generation levels predicted for CPP compliance with $5-$6 gas.

“We are certainly in a period of real change in the industry, and that is always the challenge with the power segment, not having a crystal ball on prices,” said Jennifer Macedonia, a BPC senior adviser and an author of the recent study.

“Yes, attention is warranted. There are people whose job it is to worry and think about any possible vulnerabilities. That’s where they’re focused now, and that’s good,” Macedonia said.

“The reality of it is, we don’t see a lot of electricity demand growth. We have abundant natural gas, and prices are expected to be pretty stable going forward. Renewable power continues to be more competitive. … All the places where people are trying out new things with energy efficiency are really paying off. The challenges are not insurmountable. There really is a lot of good news, but it does require some new thinking.”

“A lot of these issues can be foreseen and dealt with proactively,” Cauley remarked at last week’s BPC session. But he added, “It’s a challenge to run the grid every day. Even today, and we are going to go through a lot of change.” The uncertainties, the demanding timetable for building new energy infrastructure and the consequences if plans don’t work require a “safety valve” exception in the plan if required to deal with severe reliability issues, he said. “I need to be able to raise a flag and say, ‘I need relief,'” he said.