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Why natural gas will continue to gain over coal in the long term

Ingrid Pan, CFA

Natural gas gains popularity with power generators (Part 9 of 12)

(Continued from Part 8)

Coal is likely to remain the top source of power generation, but it loses market share to natural gas

According to projections from the US Energy Information Administration (the EIA), coal-fired power plants will remain the largest source of electricity generation over the next few decades. However, the fuel will lose market share to natural gas. The agency projects that most capacity additions will be natural gas, with natural gas-fired plants accounting for 63% of capacity additions from 2012 to 2040 in the EIA’s base case scenario.

The advantages of gas-fired turbines

As we saw in the prior section, emissions regulations are a major inhibitor to new coal-fired power plants. Aside from emissions, combined-cycle gas turbine plants, or CCGT plants (a type of gas-fired plant generally considered more efficient than its counterpart, the open-cycle gas turbine plant), offer various advantages over other types of power plants. CCGT plants offer “high efficiency, lower carbon dioxide emissions, relatively quick and cheap construction, modularity and less local resistance to the siting of new plants than for coal and nuclear plants” and have a “lower capital expenditure than coal or nuclear plants” according to a paper from the International Energy Agency. These factors all work against the possibility of new coal plant construction.

Abundance of US natural gas

In the past few years, energy companies have begun to harness new technologies that have led to increased oil and gas production in the US. The development and use of horizontal drilling and hydraulic fracturing have allowed for economic production from geological formations that previously wouldn’t have been viable—namely shale formations. This has caused natural gas prices to fall steeply, with the expectation that prices will remain relatively low into the long-term. The EIA, for instance, in its base case projections, estimates that natural gas prices will remain below $5 per MMBtu (on a yearly average basis, in 2011 dollars) until 2025.

Reduction in volatility of natural gas

In the past, power generation companies had expressed reservations about relying on natural gas because of the historically high price volatility of the commodity. Over the past ten years, natural gas prices have at times spiked to levels of up to $15 per MMBtu, compared to ~$3.50 per MMBtu currently.

Natural gas volatility has dampened over recent years, given the increase in domestic production as well as expansion of pipeline networks. The flush supply and increased ability to transport gas has been able to provide a cushion to events that might otherwise cause higher price volatility such as high demand from cold weather. Plus, the trend of coal-to-gas switching in itself has tempered natural gas price movements recently. If natural gas prices become too high, power companies are likely to switch to coal and vice versa. This keeps natural gas prices rangebound, and may have helped to allay fears from power generators about extreme price swings.

Continue to Part 10

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