Low winter gas prices allow utilities to switch from coal to gas generation

Dive Brief:

Henry Hub gas in December traded about 48% below year-ago levels, according to Argus, meaning that prices for the commodity are so low that generators may consider the unusual move of switching away from coal and to gas-fired generation during the coldest months.
At about $2.50/MMBtu is generally where the switch to gas becomes attractive, and Argus notes that December's Henry Hub bid week price was just $2.21/MMBtu.
Coal generation was outpaced by gas several times in 2015, which had never occurred before; while the U.S. Energy Information Administration (EIA) expects coal use to remain steady this year, continued low gas prices could continue to pressure the ratio.

Dive Insight:

Coal-to-gas switching is typically seen in the spring and fall — a shoulder season phenomenon — when weather is milder and generators have more flexibility. But even though demand is higher in the summer and winter, Argus points out that gas prices have remained so low that wintertime switching may come into play.

"We've definitely seen a shift over to gas with the low prices and we anticipate that continuing into this winter," Southern Co. Senior Vice President John Trawick told the outlet.

Coal use is already under pressure for a variety of reasons, but at least one analyst said the switching may have peaked. "At these price levels, every available gas-fired power plant that can burn gas for economic and grid availability reasons is doing so," First Energy Capital said in a report. "Additional gas burn with lower prices is unlikely."

The United States shuttered a record number of coal-fired plants last year, but despite that, the EIA expects burn to remain steady as the remaining plants run more often. The agency believes from 2015 to 2016 coal consumption will fall from 773.4 MMst to 773.0 MMst.

But despite the level prediction, there are indications the U.S. is moving away from coal. EIA said coal production last year was estimated to decline by 92 MMst, with the production declines occurring in all regions (led by the Appalachian region, with a 12% production decline). And carbon regulations under the Clean Power Plan, finalized last year, would make it nearly impossible to build new goal generation facilities without expensive pollution controls if the rules are not overturned in court.

Gas outpaced coal-fired generation three times last year, most recently in August when power generation from gas-fired sources produced 138,243 GWh, just ahead of coal generation's 135,430 GWh.