Daily Blog

Talkin' 'Bout My Generation, Part 2 - Natural Gas vs. Coal Fuel Costs for Power Generation

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.

As we said in our recent blog on power burn, Can’t Stop Me Now, 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 in most recent months, with gas gaining market share of total generation fuel demand — on top of wind and solar also increasing their share of the pie. Generation fuel dynamics were a driving factor in the tighter gas market balances this past winter and will continue to play a role during the injection season, including how power grids balance cost and reliability during times of extreme customer demand, such as the heat waves we’ve already seen this month in Texas and other parts of the country. With that in mind, it seemed a good time to revisit the basics of the fuel switching phenomenon, including the major factors behind it.

In Part 1, we walked through the concepts underlying how generation capacity is dispatched throughout the day, such as the daily load curve and the generation fuel stack. From there, we examined the economic and operational factors that can drive or constrain the dispatch of one fossil fuel over another, including weather conditions, the locations of competing generation capacity on the transmission grid, the operational requirements for keeping the grid reliable during high-demand periods, plant outages, and the fuels’ relative costs. As we concluded in that blog, of all the factors, fuel cost has the biggest influence on fuel switching decisions. So next, we need to understand how to calculate and compare fuel costs for a typical gas vs. coal plant on an apples-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.

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