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Limited U.S. coal-to-gas switch predicted in 2011

Jan. 14, 2011, Washington, D.C. – Physical limitations for eastern U.S. electric generators to switch fuels from coal to natural gas means that fewer plants will make the change this year, analysts with investment bank Morgan Stanley say.


January 14, 2011
By Argus Media

Jan. 14, 2011, Washington, D.C. – Physical
limitations for eastern U.S. electric generators to switch fuels from coal to
natural gas means that fewer plants will make the change this year, analysts
with investment bank Morgan Stanley say. Natural gas trading around $4/million
BTU replaced nearly 40 million tons (36 million tonnes) of coal-fired
generation in 2010, but the trend is not expected to erode further market share
from coal in 2011, according to Mark Liinamaa, a Morgan Stanley mining and
metals industry analyst.

Depending on the region, natural gas-fired
generation is cheaper than coal at current prices, according to Liinamaa. For
instance, natural gas trading at $4/million BTU is approximately equivalent to
Central Appalachian coal selling in the $49/ton range, which is well below
marginal mining costs, he says.

With natural gas viewed as a more
economical fuel that makes compliance with existing and pending emissions
regulations easier, most of the generating stations with the capability to
switch fuels have already done so, according to Liinamaa. The majority of fuel
switching happens in regulated power markets in the southeastern United States.

“At the end of the day, a lot of the hit
from natural gas has already been felt,” says Liinamaa.

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Other basins can compete more economically
with natural gas. Liinamaa says natural gas prices would have to fall below
$3.25/million BTU to be cheaper than Illinois Basin coal and to $2.75/million
BTU to compete against Powder River Basin fuels.

Greg Gordon, a utilities analyst with
Morgan Stanley, says the cost and planning required to shut down coal-fired
boilers would also limit coal-to-gas switching. “You can maybe cycle
[coal-fired boilers] down 60%, but you can't shut them off,” he says. Altering
a station's generation profile also takes time, meaning that fuel buyers have
to perceive extended cost advantages months in advance, rather than making spot
purchases based on daily price fluctuations, according to Gordon.

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