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.
This is a reboot of our short 2012 blog series examining the economics of fuel switching. Back then — and for most of the Shale Era years — the conversations around fuel switching were primarily about how much gas the power generation sector could soak up. Gas supply abundance and a lower-price environment meant that gas was increasingly competitive with coal. The economics, along with environmental regulation, spurred a massive shift in power generation capacity — i.e., gas plant additions and coal plant retirements — to the point where the share of gas demand in the power sector has far surpassed coal. In 2012, we explored the question of whether there was sufficient gas-plant capacity for coal-to-gas switching to occur. Now, with the gas inventory at the lowest in three years and gas futures hitting 14-year highs during the lower-demand shoulder season, the question is more about whether and to what extent increased coal-fired generation can help balance the gas market this injection season.
Coal regained market share from gas through much of 2021 as gas prices rose, but, as we said in Can’t Stop Me Now, coal’s share of the power sector has slipped in recent months as the coal market has been dogged by its own supply shortages and record-high prices, particularly in the U.S. Northeast. As a result, gas market share (i.e., power burn) has maintained or increased on a temperature-adjusted basis in recent months. As we concluded in that blog, without that switching mechanism, gas burn for power is likely to remain elevated even at higher gas prices, which, in turn, raises the stakes for ongoing volatility and price spikes this injection season.
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