Lower natural gas prices could eat away at coal in 2015

The recent slide in natural gas prices is another bad omen for coal-fired generation moving into 2015, especially in the PJM Interconnection market, according to UBS Global Research.

Natural gas prices in the Mid-Atlantic have slipped below $2/mmBtu recently, and “we see the potential for meaningful coal-to-gas switching to impact Appalachian coal plants yet again,” according to a Dec. 31 commentary by UBS Analyst Julien Dumoulin-Smith.

“We suspect PJM (largely centered over the Mid- Atlantic) could yet see a meaningful re-entrenchment in dispatch for those with meaningful Northern App (NAPP) coal exposure,” the UBS analysis found.

Power generators in PJM such as FirstEnergy (NYSE:FE), PPL (NYSE:PPL) and NRG Energy (NYSE:NRG) could be particularly sensitive to this trend, UBS said.

The coal-to-gas swing could be “localized,” UBS said. “Henry Hub futures for ’15 at $3.17/MMBtu remain above the 2012 average of $2.75, suggesting we’re still not quite back to the same lows which triggered widespread switching across the US,” UBS said.

The UBS commentary said that roughly 5,000 MW of new capacity has cleared the 2015/2016 PJM capacity auction and almost all of it is combined-cycle natural gas.

“We suspect coal-to-gas switching stats will only be further skewed upwards by the permanent retirement of coal plants impacted by the EPA’s forthcoming MATS [Mercury and Air Toxic Standards] regulations in May,” according to UBS. “While the Supreme Court has recently agreed to review the issue, opening a window for the Stay of specific unit retirements, we know of no utilities or IPPs moving forward with such a request,” UBS went on to say.

“We expect 2015 will continue to see modest coal plant retirements, potentially even on the back of the latest coal ash regulations as waste water handling systems and other requirements from Regional Haze programs gain clarity,” the firm said. “We still see the next major wave of coal plant retirements as being focused around the 2020 timeframe, mostly in the West,” UBS said.

“Back East, we suspect 2015 will see a continued trend towards conversion of coal plants to gas, leveraging existing steam boilers to use gas feedstocks to operate – and meet compliance with forthcoming air regulations,” UBS said.

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.