fuel switching

Many have argued that U.S.-sourced LNG can be instrumental in combating climate change by helping countries around the world replace coal-fired generation with natural gas-fired power. While this argument carries a lot of force in the eyes of many politicians and LNG marketers, the questions of exactly how — and to what extent — LNG can replace coal need to be asked. In today’s RBN blog, we’ll look at the challenges that the expanded use of LNG faces in countries with high coal utilization and the possible means of overcoming them. 

Natural gas futures prices have rocketed to 14-year highs in the past couple of months — during the lower-demand spring months, no less — and they are now trading at 3x where they were at this time last year. The CME/NYMEX Henry Hub futures for June delivery shot up to a high of $9.40/MMBtu in intraday trading last Thursday, the highest level we’ve seen since summer 2008, before expiring at $8.908/MMBtu, nearly $6 (~200%) higher than the June 2021 expiration settlement at just under $3/MMBtu. The newly prompt July futures retreated ~17 cents Friday to about $8.73/MMBtu, but that’s still nearly triple where July futures traded last year. It’s safe to say the low fuel cost of gas-fired power generation that defined the Shale Era has evaporated. Historically, at today’s sky-high prices, gas would have given up market share to coal in the power sector. However, the coal market is battling its own supply shortage and Eastern U.S. coal prices are at record highs. What does that mean for generation fuel costs and fuel switching? In today’s RBN blog, we break down the math for comparing gas vs. coal fuel costs.

A tight coal market and record-high coal prices in the Eastern U.S. have suppressed gas-to-coal switching in recent months, despite the gas market also contending with a supply squeeze and gas prices trading at Shale Era highs. The coal-market constraints have contributed to record, or near-record, gas demand in the power sector, with gas gaining market share of total generation fuel demand — in spite of wind and solar increasing their share of the pie. Generation fuel dynamics were a driving factor in the tighter gas market balances this past winter and also play a role in how power grids balance cost and reliability during times of extreme customer demand, such as the record-breaking heat wave expected to hit Texas in the coming days. In today’s RBN blog, we take a look at power generation fuel economics, particularly the fuel-switching phenomenon and its underlying drivers.

Despite the highest natural gas futures prices in over a decade, its use for power generation in the Lower 48 has set records in recent months. 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, there’s more to it than that: a tight coal market, marked by low stockpiles, high export demand and record high prices, is limiting gas-to-coal switching even further, making gas burn for power much more inelastic to price. In today’s RBN blog, we take a closer look at this key intersection of the gas and coal markets.

The generation of power from natural gas will be the most important growth sector for the gas industry for the foreseeable future – certainly for producers, but also for the pipelines that provide the transportation service to deliver the gas to power generators. Handling the infrastructure and service challenges that come with increased power burn is therefore a priority. This is true for the nation as a whole, but was specifically raised this year by the Midwest Independent System Operator (MISO) in the heart of coal country - where coal-to-gas switching was most significant during 2012. We covered the MISO reports detailing their infrastructure concerns previously (see Hooking Up the Next Generation). This blog post is a review of challenges that the industry must address on both the regional and national level.