December 13, 2018 Read More →

Analysts don’t expect gas to coal switching this winter

S&P Global Market Intelligence ($):

Even though some coal-fired generation is becoming competitive at the margins since natural gas prices began rallying in November, utilities’ reluctance to restock their coal inventories suggests the fuel will continue to play a “shrinking role” in meeting system load, according to an analyst with Morningstar Commodities Research.

The winter strip natural gas futures price at Henry Hub is around $4.25/MMBtu as generators in the PJM Interconnection see coal prices around an equivalent of $3.81/MMBtu, Matthew Hong, Morningstar’s director of research for power and gas, said in a Dec. 12 note. That should encourage generators to favor coal over gas, Hong said, but high demand for coal exports, along with reduced capacity for both mining and burning coal, is limiting any potential gains from the recent “unexpected reversal in coal generation economics.”

Every 25-cent change in the price of Henry Hub natural gas would theoretically equate to a 1% shift in market share from gas to coal, according to Seaport Global Securities LLC analyst Mark Levin. However, despite a cold start to the winter and low storage levels of both coal and natural gas, there is “no evidence of gas-to-coal switching” even as pricing dynamics become more supportive of coal generation, Hong said.

“Conventional wisdom in PJM was that at times of high demand during the winter, coal generation would provide a backstop against more volatile natural gas prices,” Hong said. “However, a decade of retirements in coal generation and mine shut-ins in Central Appalachia have shrunk the safety net coal plants used to provide. … Coal producers need more than high prices to invest in expanding production.”

East of the Mississippi, coal producers may have between 5 million and 10 million tons of excess capacity to ramp up steam coal production, Levin said in a Nov. 20 note. While he suggests the risk versus reward around strengthening thermal coal prices could justify taking a gamble on coal companies such as Consol Energy Inc.—one of his top thermal coal-levered picks — on the whole, he said producers likely could only boost U.S. steam coal production by about 6% to 8%.

“Although Central Appalachian coal prices are at levels that support additional production, the long-term domestic forecasts do not support the investment,” Hong said. “As a result, we enter the peak winter months when coal generation typically ramps up with fewer coal generators and constrained supplies of physical coal.”

More ($): No apparent gas-to-coal switching despite economic reversal in PJM, analyst says

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