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Burnin' For You - The Impact of Coal- and Gas-Fired Generation Shifts on Summer Natural Gas Prices

Last summer, a tight coal market in the Eastern U.S. made an already tight natural gas market even tighter. Low coal stocks, dwindling production and transportation constraints led to exorbitant premiums for Appalachian coal and limited coal consumption in the East, leading to record gas demand for power generation — even as gas prices soared to 14-year highs. Now, gas markets are considerably looser, storage inventories are high, and gas prices are signaling the need for more demand (or lower supply) to balance the market and avoid storage constraints this injection season. But the coal market has eased as well. Coal production is up, coal stocks are too, and Appalachian coal prices have plunged in recent months. What will that mean for power burn and balancing the gas market this summer? In today’s RBN blog, we look at the latest developments in the coal and gas markets, the potential for coal-to-gas switching, and how those dynamics could impact gas balances.

When we looked at coal vs. gas generation and fuel-switching economics around this time last year — see Can’t Stop Now and our Talkin’ ’Bout My Generation series — the gas market was in the midst of what turned out to be one of the most bullish years in over a decade. Prices soared above $7/MMBtu for much of the injection season, reaching almost $10/MMBtu by August. Despite the highest gas prices in 14 years, however, power burn (i.e., gas demand for power generation) hit record highs and the gas market’s share of power generation increased year-on-year to 40% in 2022. This, despite increases in wind and solar generation. Why? While gas prices were high, coal prices were even higher on an MMBtu basis and it was coal that gave up its piece of the power-generation pie as renewables rose.

This is in part by design: economics and environmental regulation have broadly favored gas-fired plants and pushed into retirement hundreds of coal-fired plants in the last decade or so, reducing price-driven fuel-switching capabilities between the two fuels. However, tight coal supplies in the Eastern U.S., marked by low stockpiles, high export demand and record-high prices, limited gas-to-coal switching even further last year, making gas burn for power much less responsive to price signals.

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