Electric generators have been running their existing coal capacity at higher rates so far this year in response to the increasing cost of natural gas relative to coal, said the U.S. Energy Information Administration in the July 9 version of its Short Term Energy Outlook report.
As a result, the share of total U.S. generation fueled by coal during the first four months of 2013 averaged 39.5% compared with 35.4% during the same period last year. In contrast, the share of generation fueled by natural gas fell from an average of 29.5% during January-April 2012 to 25.8% this year.
EIA expects coal-fired power plants to continue their increased level of generation, averaging 40.1% of total generation in both 2013 and 2014. The share of U.S. generation fueled by natural gas is projected to average 27.6% in 2013 and 27.3% in 2014.
Coal prices were down 2.9% for the first four months of 2013 compared with the same period last year. EIA expects this trend to continue, with nominal annual average coal prices to the electric power industry falling for the first time since 2000, from $2.40/MMBtu in 2012 to $2.36/MMBtu in 2013. EIA is forecasting average delivered coal prices of $2.40/MMBtu in 2014.
EIA expects total U.S. coal consumption to increase from 890 million tons in 2012 to 950 million tons in 2013 as consumption in the electric power sector rises due to higher electricity demand and higher natural gas prices. Consumption grows at a more modest pace of 1.7% to 966 million tons in 2014.
Total U.S. coal production is expected to change very little from last year, totaling 1,017 million tons in 2013. Inventory draws, combined with a small increase in coal imports, meet most of the growth in consumption in 2013. Coal production is forecast to grow by 3.3% in 2014 to 1,050 million tons as inventories stabilize in the face of increasing consumption.
EIA expects coal exports to decline from 126 million tons in 2012 to 112 million tons in 2013. Exports are projected to total 108 million tons in 2014. Continuing economic weakness in Europe (the largest regional importer of U.S. coal), slowing Asian demand growth, increasing supply in other coal-exporting countries, and falling international coal prices are the primary reasons for the expected decline in U.S. coal exports.
Gas consumption up for non-power uses, but expected to drop for generators
EIA expects that natural gas consumption, which averaged 69.7 Bcf/d in 2012, will average 70.1 Bcf/d and 69.7 Bcf/d in 2013 and 2014, respectively. Colder winter temperatures forecast for 2013 and 2014 (compared with the record-warm temperatures in 2012) are expected to increase the amount of natural gas used for residential and commercial space heating. However, projected year-over-year increases in natural gas prices contribute to declines in natural gas used for electric power generation from 25.0 Bcf/d in 2012 to 22.4 Bcf/d in 2013 and 22.2 Bcf/d in 2014, although these forecast levels are still high by historical standards.
Natural gas spot prices averaged $3.83/MMBtu at the Henry Hub in June 2013, down 21 cents from the previous month’s price. EIA expects the Henry Hub price will increase from an average of $2.75/MMBtu in 2012 to $3.76/MMBtu in 2013 and $3.91/MMBtu in 2014.
It is in the $3-$4/MMBtu range that coal becomes competitive with gas, with Powder River Basin coal generally competitive at the low end of that range, and other coals, like Northern Appalachia and Illinois Basin production, competing in the mid part of that range. Central Appalachia coal is generally competitive at plus $4/MMBtu gas prices. So this EIA prediction doesn’t give coal much safety margin.
Natural gas futures prices for October 2013 delivery (for the five-day period ending July 3, 2013) averaged $3.62/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95-percent confidence interval for October 2013 contracts at $2.69/MMBtu and $4.88/MMBtu, respectively. At this time a year ago, the natural gas futures contract for October 2012 averaged $2.90/MMBtu and the corresponding lower and upper limits of the 95-percent confidence interval were $1.74/MMBtu and $4.82/MMBtu.