Why higher gas price may increase capacity in entire value chain

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Why the new EPA carbon emission proposal impacts gas and coal (Part 4 of 6)

(Continued from Part 3)

Higher natural gas prices may impact entire value chain

The Environmental Protection Agency (or EPA) says the average age of the nation’s coal fleet is 42 years—meaning that most of them aren’t nearly as efficient as new coal plants, although many have been updated. As of December, 2012, there were 557 coal-fired plants and 1,714 natural gas powered plants. If the new proposal comes into effect, many of the coal-fired plants would be negatively affected or will be replaced by natural gas or renewable-energy plants.

Natural gas accounted for the highest capacity addition in 2013

According to the U.S. Energy Information Administration (or EIA), the natural gas-fired power plants accounted for just over 50% of new electricity capacity added in 2013. Solar provided nearly 22%—a jump up from less than 6% in 2012. Coal provided 11% and wind provided nearly 8%. Almost 50% of all capacity added in 2013 was located in California. In natural gas generated electricity generation, both the combustion turbine peaker plants, which generally run only during the highest peak-demand hours of the year, and combined-cycle plants, which provide intermediate and baseload power, were equally productive during the year. In aggregate, ~13,500 megawatts (MW) of new capacity were added in 2013—less than half the capacity added in 2012.

The regulations also could affect natural gas-fired power plants, which emit about half as much greenhouse gas as coal plants. The EPA said that natural gas-fired combined cycle plants in the United States are 14 years old on average, which is much lower than the coal-fired plants.

However, if the EPA proposal is indeed enacted, there could be long-term consequences. A stringent regulation would still impede the choice of fuel source even if the natural gas price increases significantly higher than coal price in the U.S. There still might not be a push to build more coal-fired plants. So, natural gas would continue to enjoy higher long-term demand, as coal becomes more disadvantaged by regulation.

The EPA proposal makes natural gas the first choice fuel for the power generation. This is positive for domestic natural gas-weighted producers such as Chesapeake Energy (CHK), Anadarko (APC), Range Resources (RRC), and Southwestern Energy (SWN). Natural gas price movements are also relevant for commodity ETFs such as the U.S. Natural Gas Fund (UNG)—an exchange traded fund designed to track the price of Henry Hub (the standard benchmark for domestic natural gas prices).

Continue to Part 5

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