Competitive fuel pressures between natural gas and coal led to a marked shift in electricity generation resource utilization in 2012, the Federal Energy Regulatory Commission found in a State of the Markets report released July 3.
Broader market declines in the price of natural gas as compared to a more modest decline in coal prices drove the trends in 2012, FERC noted. These trends may drive investment decisions with respect to the fuel-type of new generating plants which may lead to further demand for construction of natural gas-fired facilities in the coming year.
Natural gas-fired generation reached 31% of total generation in 2012, up from 25% in 2011. The increase resulted in displacement of coal-fired generation, particularly generation burning Appalachian coal. Coal’s share of net generation declined to 39% from 43% in 2011. While on an annual basis coal-fired generation was still the largest source of electricity supply, by May 2012 the spread in electricity production between monthly amounts from coal and from natural gas had narrowed sharply.
Lower natural gas prices have driven the shift in generation resources because of increases in natural gas supply from shale gas production. For the first time in over ten years, natural gas began to trade at a discount to coal in the third quarter of 2011. Through the first half of 2012, the price of natural gas averaged $2.38/MMBtu, 45% lower than for the same period in 2011. By April 2012, natural gas at the Henry Hub traded near $2/MMBtu, over $1/MMBtu cheaper than Appalachian coal when adjusted for the heat rate difference between the two technologies.
The national shift from coal-fired to natural gas-fired generation was reflected in a significant increase in the use of combined-cycle power plants. With lower fuel prices, natural gas-fired combined-cycle units are less expensive to run due to their high efficiency fuel prices. As a result, they increasingly operated in a baseload mode of generation (greater than 50% capacity utilization, or capacity factors).
Sixty three percent of the nation’s combined-cycle plants operated above 50% capacity factors during 2012, compared to 29% in 2007. Nationwide, the share of combined-cycle plants running at 70%-plus capacity factors reached 18% compared to just 7% in 2011.
Biggest shifts found in the Eastern Interconnection
The most notable shifts from coal-fired to gas-fired generation occurred in areas of the Eastern Interconnection relying on Appalachian coal, FERC wrote. This was particularly the case in PJM and the Southeast where there is significant use of Appalachian coal, but much under-utilized combined-cycle generation capacity. For PJM and the Southeast, coal’s share of net generation declined to 40% of total generation from 47% in 2011. Electricity produced by natural gas-fired generation was 31% of the production in 2012, an increase from 24% in 2011.
The Midcontinent Independent System Operator (MISO) and Southwest Power Pool (SPP) regions, utilizing more of the lower cost Powder River Basin (PRB) coal, experienced less displacement of coal by natural gas. Appalachian coal costs averaged about $63 per ton in 2012 compared to $11 per ton for lower-Btu PRB coal. Even allowing for the higher heat content of Appalachian coal, and higher transportation costs for PRB coal, PRB coal enjoyed a delivered price advantage over Appalachian coal.
As the price of natural gas and coal decreased relative to 2011, electricity prices also declined. In the eastern regions burning Appalachian coal, natural gas increasingly became the marginal generation source.
In PJM, for example, among all marginal resources affecting the real-time price in the first nine months of 2012, 58% were coal-fired generators, down from 69% of the marginal resources in 2011. At the same time natural gas units were marginal 31% of the time up from 26% in 2011. However, since the prices of the fuels were close on a $/MMBtu basis, the range of electricity prices produced were driven by overall lower costs of the fuels. Throughout the rest of nation, natural gas-fired generation remained the marginal resource.
Lower utilization of coal-fired generation, along with an expected need to invest in emissions-related equipment, led to announcements by owners to schedule retirements of coal-fired power plants. Some analysts anticipated an upturn in new natural gas-fired generation to be constructed in the coming years, especially in areas close to shale gas formations. These retirement or build decisions will be a key determinant in coming years’ electricity resource fundamentals, FERC said.