| From: Glenn Petersen | 4/4/2012 11:09:21 AM | | | of 6108 | | | The last paragraph - a qualifier - is important:
A Lump of Coal for Gas Bulls
By LIAM DENNING
Wall Street Journal
March 29, 2012, 11:45 a.m. ET
In general, a bullet to the coal industry provides a shot in the arm for natural gas. That the latest proposals from the Environmental Protection Agency haven't done so is telling.
The EPA wants to limit carbon emissions from new power plants to a level that, in practical terms, could only be met by efficient gas-fired turbines. This is supportive of gas taking market share from its lumpy rival.
Except the market got there first. Regardless of the EPA proposal, it makes no sense to build a new coal-fired plant anyway.
A typical coal-fired power plant burns 10,000 British thermal units of fuel to produce one megawatt hour of electricity. With Appalachian coal costing $55 a ton, the fuel cost alone, not including transportation, is $22 per MWh. An efficient gas-fired power plant can get one MWh for 7,000 BTU of fuel. With gas at $2.24 per million BTUs, the implied fuel cost is under $16.
Plants in the Midwest and West burning much cheaper Powder River Basin coal do better, despite the lower energy content and often higher transportation costs. Even so, those Western plants now produce electricity for just a couple of dollars less per MWh than rival gas-fired plants, compared with a spread of $10 to $15 through much of last year, according to BofA Merrill Lynch. Texan plants burning PRB coal have lost their competitive edge altogether.
On top of this, building one megawatt of new coal-fired capacity costs more than $3 million compared with $1 million for gas-fired plants, according to Sanford C. Bernstein. Overall, based on a long-term coal futures price of $75 per ton, justifying a new coal-fired plant would require gas to be at $7 per million BTU, according to Tudor, Pickering, Holt & Co. Current futures don't hit that level even 10 years out.
Because of all this, gas is eating into coal's share of the generation market already. But even bigger gains switching are needed to cut into the record amount of gas currently in storage. This is why gas prices remain on the floor. What's more, reduced demand has pushed Central Appalachian coal prices down almost 30% in the past year. Given current trends, they look likely to continue going down. So in order to maintain its competitiveness against coal, gas may have to fall even further.
The twist, as BofA points out, is that while gas-fired power is very competitive against the coal-fired variety based on near-term prices, it is less so based on futures prices beyond the end of this year. That is because measures like the EPA proposals point to tighter gas markets further down the road. For utilities, that reduces the incentive to switch to gas. Perversely, the latest headlines trumpeting the revival of gas and the death of coal may serve to discourage this very outcome.
Write to Liam Denning at liam.denning@wsj.com
A version of this article appeared Mar. 30, 2012, on page C10 in some U.S. editions of The Wall Street Journal, with the headline: A Lump of Coal for the Gas Bulls.
http://online.wsj.com/article/SB10001424052702304177104577311490076867340.html?mod=rss_Heard_on_the_Street |
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