Case study: Natural gas prices influence coal-to-gas switching

Market Realist

Natural gas gains popularity with power generators (Part 3 of 12)

(Continued from Part 2)

The primary short-term determinant for natural gas demand from the power sector is price

As we saw in the prior section, the relative price difference between coal and natural gas is one of the largest determinants of how much coal-to-gas switching occurs. As natural gas becomes cheaper than coal, the economic incentive for coal-to-gas switching becomes greater. The inverse is also true. If natural gas becomes more expensive than coal, the economic incentive for coal-to-gas switching diminishes.

Case Study: Natural gas prices versus coal prices and natural gas power generation market share in the recent past

The fall and winter of 2010–2011 compared to 2011–2012 as well as the spring and summer of 2011–2012 show how the relationship between natural gas prices and coal prices can affect natural gas market share. Analysts make seasonal comparisons, as natural gas use for power generation peaks in summer due to increased air conditioning.

During the 2010–2011 fall and winter (October 1, 2010, to March 31, 2011), Henry Hub natural gas prices averaged $4.09 per MMBtu and Central Appalachia coal (CAPP coal) averaged $75 per ton. During that period, natural gas had a 22% market share in the US power generation market.

In the next fall and winter, from October 2011 to March 2012, natural gas prices averaged $2.99 per MMBtu—a dramatic drop. Coal prices also dropped year-over-year, but not as dramatically, and natural gas gained another five percentage points of market share year-over-year.

Natural gas had been gaining market share slowly but consistently for many years. But for the fall and winter of 2011–2012, natural gas market share for power generation jumped from 22% to 27% due to natural gas’s especially low price during that period.

Fall/Winter

Avg Natural Gas Price

(Henry Hub)

$/MMBtu

Avg Coal Price

(CAPP)

$/ton

Nat Gas

Market

Share

10/1/2010 to 3/31/2011

$4.09

$75

22%

10/1/2011 to 3/31/2012

$2.99

$66

27%

Meanwhile, for the spring and summer seasons (April through September) of 2011 compared to 2012, natural gas prices dropped dramatically—from $4.21 per MMBtu (million British thermal units) on average to $2.62 per MMBtu on average. During that same period, coal prices also dropped, but less dramatically. Natural gas gained seven percentage points of market share year-over-year in that time.

Spring/Summer

Avg Natural Gas Price

(Henry Hub)

$/MMBtu

Avg Coal Price

(CAPP)

$/ton

Nat Gas

Market

Share

4/1/2011 to 9/30/2011

$4.21

$76

26%

4/1/2012 to 9/30/2012

$2.62

$56

33%

Note that the natural gas prices quoted are priced at Henry Hub, which represents the US benchmark. However, natural gas prices can vary across the country, with spreads sometimes greater than $1 per MMBtu. Though the price of natural gas at Henry Hub and the prices in other areas in the US highly correlate, ultimately it’s the price that the power plant pays for the natural gas that matters. Plus, the coal price quoted represents Central Appalachian Coal, and coal prices can also vary significantly due to differences in location and quality.

Continue to Part 4

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