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Just the Facts, Ma'am – Natural Gas is Leaving Coal in the Dust. But will coal retaliate?

Last week I attended the LDC Gas Forum Southeast in Atlanta.  One of the folks I met at the conference was a manager of fuels risk management for a Kentucky utility.  To protect the innocent, we’ll call him Joe Friday.

Even though Joe’s company is in the heart of coal country and has a sizable portfolio of coal generation assets, he was attending a conference primarily focused on natural gas.  Suspicious?  Don’t be.  Gas is really cheap.  Cheaper than coal.  Consequently this year his utility has made a significant shift to natural gas fuel. Joe has simple cycle plants running base load at the same time coal plants are shuttered.  Joe has a number of peaker gas facilities which normally run only to meet peak demand that this year are running 24X7.  And Joe’s coal inventories are building.  This is because his coal contracts are ‘take-or-pay’, which means he must buy the coal whether he burns it or not.

There is no mystery about the decision-making process to burn gas instead of coal.  Joe’s job is to provide power to his company’s customers at the lowest price possible.  And right now, the best way for Joe to do that is to burn as much gas as his system can handle.  Granted that the majority of Joe’s generation is still coal.  But the magnitude of his gas burn is unprecedented.

Joe’s situation is anything but unique.  The graph below is the ‘Natgas power burn’ – gas burned for power generation based on estimated data from Bentek’s daily Supply/Demand Report.  The curves have been statistically smoothed to make the trends more obvious. And obvious it is.  The power burn for 2012 is 5 to 6 bcf per day above the same timeframe in 2011 and 2010.  Low prices are clearly encouraging a lot of power generators to cut back on coal and run natural gas.

According to the Bentek power burn report, the burn per degree day is up by about 33%, which is just another way of saying that power generators are burning a lot more gas on a temperature adjusted basis. 

Genscape, the company that monitors which power generation facilities are running and which are sitting idle via their monitoring devices provided some great data that substantiates this huge shift to gas.

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