Coal power among the losers in shale boom, S&P says

The shale gas boom is good for the U.S. economy but not necessarily for coal producers, coal-fired power generation and renewable energy interests, according to a May 21 report from Standard & Poor’s.

Standard & Poor’s Ratings Services believes the shale energy boom is becoming an increasingly important pillar of U.S. economic growth, along with the housing recovery.

Surging natural gas output, in combination with mild weather, created a glut that markedly drove down prices through the middle part of last year. Gas prices fell by about 85%, to $1.89/mmbtu in April 2012, from a June 2008 high of $13.19/mmbtu.

But the advent of cheap, abundant domestic natural gas from shale has made a big dent in the coal sector. S&P noted that Patriot Coal has filed for bankruptcy. Also many electric utilities have, where possible, switched to gas-fired units for power generation.

Ironically, a recent bounce-back in gas prices “currently makes coal in many basins as economical as gas for utilities,” S&P said.

Freight railroad revenues have also suffered from falling coal volumes for use in electricity generation.

S&P, however, believes the trend from coal-to-natural gas power has “primarily resulted from tougher government emission standards, which have made construction of new coal-fired plants uneconomic.”

However, “the degree” of fuel switching is a function of the relative prices of the two fuels, S&P said.

Solar and wind power producers in the alternative energy sector, as well as manufacturers of solar panels and wind turbines, are other industries that lower natural gas prices have hurt, as they lead to cheaper wholesale electric prices and a reduction in these industries’ competitiveness, S&P said.

“When natural gas prices were well below $4/mmbtu in 2010-2012, it made economic sense for utilities to use NG instead of coal generation. Now that natural gas prices have risen to around $4/mmbtu, the economics of running gas versus coal units have become fairly similar,” S&P said.

“One positive effect of low gas and coal prices on utilities is that this gives regulators more flexibility in agreeing to expand utility capital expenditure budgets to upgrade capacity and infrastructure without having to significantly raise rates to electricity consumers,” according to the ratings agency.

For merchant power, the effects of shale production have been a mixed bag. While it has been beneficial for large gas-fired “fleets,” such as those of Calpine (NYSE:CPN), it has been a bane for operators of large nuclear and coal-fired generation.

Pipeline constraints in some regions also complicate the growth of natural gas power generation, S&P said.

Absent a major onshore accident involving hydraulic fracturing (fracking) and horizontal drilling extraction technologies, S&P believes that the future of U.S. shale development looks strong.

The price of domestic natural gas will likely be far cheaper than in Europe and Japan, and even Asia, for some time, S&P said. U.S. government policy decisions about whether to limit exports in an attempt to maintain low domestic gas prices or increase exports by approving the construction of new liquid natural gas (LNG) export infrastructure are expected to affect future exports and price levels.

Managing Director David P Wood was listed as the primary author of the report, titled “Game Changer: Industry Winners And Losers From The U.S. Shale Revolution.”

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.