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.

In Thursday’s blog we looked at the opportunities for coal switching and found that there is still spare natural gas CCGT capacity available to facilitate switching. It probably makes sense if you missed that blog to go back and take a look now (__Talkin bout my generation Part I__). We examined all the drivers behind coal to gas switching and determined that only one factor is the major determinant of switching – and that is fuel costs.

Today we are going to look at natural gas CCGT and coal steam fuel costs on an apple to apples basis. To do that, I’m afraid we have to break out the calculators. Take a deep breath and grab an energy drink.

To calculate fuel cost we need to look at generation plant economics in terms of efficiency. By this we mean how efficiently the plant converts hydrocarbons in the shape of coal or natural gas molecules into electricity. Plant efficiency is measured in btu’s (a unit of energy) per kilowatt hour (btu/kwh). In a perfect plant it would take 3412 btu to generate 1 kwh of electricity at 100 percent efficiency. That perfect plant does not exist. An average natural gas CCGT plant (source EIA) runs at 44.78 percent efficiency and therefore consumes just over twice as many btus as our perfect plant - more precisely (100/44.78 * 3412) or 7619 btu/kwh. An average coal plant has 33.64 percent efficiency and consumes (100/33.64 * 3412) or 10142 btu/kwh. These efficiency rates are also known as **heat rates** by the way – so now you know what a heat rate is, if you weren’t sure before. Back to the calculators…

To figure out the fuel cost to run our CCGT plant in $/kwh we just take the 7619 btu/kwh and multiply that by a natural gas price (we are going to use NYMEX Henry Hub) quoted in MMbtu to get a $/kwh fuel cost. The standard electric power conversion is actually to $ per megawatt hour ($/Mwh) because electricity prices are usually quoted in megawatt hours (1000 kilowatt hours). For the record, a megawatt hour of electricity is enough to power about 330 typical US homes but we digress... By converting to $/Mwh we end up with 7619 btu/kwh = 7.619 MMbtu/Mwh. That means we have to buy 7.619 MMbtu’s of gas to get 1 Mwh of electricity. Fairly straight forward if you had a calculator handy.

Now comes the hard part – the coal. So far we know our coal plant uses 10412 btu/kwh which is 10.412 MMbtu/Mwh. Our problem is that coal prices are quoted in $/short ton ($/ST) so we need to figure out the btu energy content of our coal before we can do the conversion. The coal price we are going to use is the NYMEX coal futures contract which is Central Appalachian coal with an energy content of 12000 btu/lb. There are 2000 lb in a short ton so that makes (12000 * 2000) = 24 MMbtu of energy in a short ton of NYMEX coal. If our plant uses 10.412 MMbtu/Mwh and coal is priced in units of 24 MMbtu then we need to multiply the coal price by (10.412 / 24 ) or 0.4226 to get to an equivalent cost of coal to generate our Mwh of electricity.

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