Talkin bout My Generation

In little more than two weeks, the CME/NYMEX prompt natural gas futures contract is up $0.76 to close at $2.945/MMbtu on Thursday (see graph below).  That’s getting dangerously close to $3.00.  Yesterday we noted that it was the drop below that $3.00 threshold that kicked off serious coal to gas switching in January.   Now that the price is near to crossing the $3.00 mark the other way, we better look carefully at how plant fuel costs drive generation economics for natural gas versus coal.  To do so we’ll take a deep dive into the math.

The coal to gas switching debate has been raging for months.  How much is happening?  How long will it last?  Could switching continue to increase?  Will the generators save the producers from themselves?  So far this year, that latter assertion seems to be the case.  Additions to natural gas power burn by electric generators have been about the only thing propping up natural gas prices. If the generators weren’t burning so much gas, the storage surplus would be through the roof.  Last week EIA announced that natural gas matched coal’s share of U.S. generation for the first time in April.  That’s a big deal. In today’s blog “Talkin bout My Generation – Coal to Gas Switching Part I” we uncover the drivers behind the shift to natural gas generation, and set the stage for a deep dive into the longer term implications for gas markets.