POWER September 2012 - 77

THE FUTURE OF NATURAL GAS
1. Low gas prices put pressure on coal. As natural gas prices fall, increasing amounts
of coal from a variety of basins become competitively disadvantaged and may create the conditions
for price-motivated, opportunistic switching. For comparative purposes, the delivered cost
of coal is shown in terms of $/MMBtu. Source: Bentek Energy
PRB
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
CAPP
NAPP
Illinois
Uinta
Imports
Other
a year to about 55 million tons this year.
Industry-wide, coal-fired generation has
dropped by 13% from 2007 through 2011
while gas-fired generation has increased
13%, according to the latest U.S. Energy Information
Administration data.
Southern Co. and AEP's experiences were
2012 NYMEX
Avg. $2.75
10.5 Bcf/d
2011 HH
Avg. $3.98
3.0 Bcf/d
matched by at least one independent power
producer besides Calpine. " The most dramatic
changes have been in the southeast and
mid-Atlantic states, " said Todd Jonas, vice
president of operations at Omaha, Neb.,-
based Tenaska, in an interview with POWER.
Many of the company's fleet of 15 gas-fired
units experienced " significantly higher " dispatch
and capacity factors of combined cycle
plants well above 50% during the first half
of 2012. Jonas said some of those combined
2011 delivered cost of coal to power plants ($/MMBtu)
2. Center of the action. Steve Webb
(left) and Shane Holeman, operators at the
natural gas-fired Tenaska Gateway Generating
Station monitor activities at the 845-MW plant
near Mount Enterprise, Texas. Many control
room operators are learning to deal with more
frequent dispatch. Courtesy: Tenaska
Power generators in the Southeast and
Northeast were among the first to displace
PRB coal burning in favor of natural gas
generation when gas prices began to drop
last year. Their decisions to switch were influenced
by transportation costs, which are
at their highest when PRB coal moves from
surface mines in Wyoming and Montana to
power plants as far away as Georgia.
coals. For example, at the Henry Hub (the
site in Louisiana where a large number of gas
pipelines interconnect and which is used to
set the benchmark price of natural gas across
the U.S.), an average gas price of $3.98/
MMBtu creates a market environment that
favors burning around 3 billion cubic feet
(Bcf) more natural gas per day for electric
power generation. As the price of natural gas
falls, the potential for natural gas to competitively
displace coal rises.
Referring again to Figure 1, at a price
of around $2.75/MMBtu, as much as 10.5
Bcf/d of additional gas demand for power
generation could result. At that price, not
only are Appalachian basin coals competitively
disadvantaged, but so too is coal
sourced from the Illinois and Uinta basins,
as well as imports. A $2.75 gas price also
exerts increased competitive pressure on
PRB coal, which is widely burned by power
plants that rely on its low sulfur content to
help reduce air emissions.
September 2012 | POWER
Higher Gas Burn for Southern
In addition to Calpine, the natural gas revolution
has also affected more traditional
utilities that have historically relied on coal
to fuel their plants. The switch to natural gas
generation in the Southeast was confirmed
by Thomas Fanning, Southern Co. CEO, who
said during an April 25 earnings conference
call that his utility's natural gas combined
cycle fleet achieved an average capacity factor
of 70% during the first quarter. Based on
price projections, he said the utility could
burn more than 600 Bcf of natural gas this
year, or about 1.7 Bcf per day.
Southern Co. reports that its fuel mix for
2012 will be 47% natural gas and only 35%
coal, a marked change from five years ago,
when the company produced 70% of its electricity
using coal and only 16% from natural
gas. Fanning said Southern Co.'s first-quarter
gas purchases accounted for more than 2%
of all U.S. natural gas consumption, making
the company the third-largest user of natural
gas among utilities.
American Electric Power (AEP) reported
in April that its natural gas consumption had
increased 62% over the past year and that its
gas-fired combined cycle plants were, with
one exception, running at an 85% capacity
factor. The utility's coal use is expected
to drop from an average of 80 million tons
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cycle plants posted capacity factors that have
" at least doubled if not tripled " from 2011.
" Obviously, it's very welcomed, " he said,
adding that the plants-including the 845MW
Tenaska Gateway Generating Station
(Figure 2)-are designed and built to support
high capacity factor profiles.
Natural gas's newfound competitiveness
was acknowledged in mid-June by Jim Rogers,
CEO of the newly merged Duke Energy
and Progress Energy, who told an industry
meeting, " Today we're dispatching hydro
first, then our nuclear, then natural gas before
even our most efficient coal plants. " He
said gas prices would have to exceed $4.25/
MMBtu before the utility would start dispatching
even its most efficient coal units
ahead of natural gas.
One consequence of low natural gas prices
is higher coal inventories. An Indiana coal
plant reported having 1 million tons of coal
on the ground at the end of June, equal to
around a 70-day supply or roughly double
what the plant's operator considers optimal.
What's more, GenOn declared a force majeure
last spring in an effort to stop coal deliveries
as inventories grew to what it said
were levels that compromised safety. And
some utilities resorted to forced coal burns
in an effort to reduce their inventories and
make room for additional deliveries.
Less Switching in the West
Low natural gas prices helped opportunistic
switching move west this past spring into
states such as Wisconsin, Minnesota, and
Texas. Coal-fired power plants in the Rocky
Mountains showed little evidence of opportunistic
coal-to-gas switching, however,
largely due to their proximity to western coal
supplies, which kept transportation costs
low and helped coal remain competitive.
In the Pacific Northwest, improved hydro
generation conditions through the spring
kept gas demand low. And in California and
77
2011 delivered cost of coal to power
plants ($/MMBtu)
$0.80
$1.20
$1.60
$2.00
$2.40
$2.80
$3.20
$3.60
$4.00
$4.40
$4.80
$5.20
$5.60
$6.00

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POWER September 2012

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