Will Cheap Natural Gas Replace Coal in U.S. Electricity Generation?

by Trefis Team
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Natural gas prices in the U.S. have fallen to their lowest levels in a decade and have fallen below $2/Million British thermal units (MMBtu) on the back of excess production and low winter demand. With prices expected to stay at the present low levels for the next few months because of low underground storage capacity, analysts expect demand for natural gas to pick up as utilities begin to shift from coal to gas because of environmental as well as economic reasons. [1]

However, there are a few concerns regarding the widespread adoption of natural gas by electricity producers in the U.S. that could delay the shift. Widespread adoption of natural gas would result in a significant increase in its price. Companies like Anadarko Corp. (NYSE:APC) and ConocoPhillips (NYSE:COP) have significant exposure to natural gas prices in the U.S.

We have a $90 price estimate for Anadarko Corp., which is at a 25% premium to its current market price.

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Reasons for change

Spot prices for natural gas dropped to about $1.85/MMbtu in the U.S. as the mild weather cut into demand over the last few months. In January, coal cost utilities close to $2.41 /MMBtu, according to EIA data. In addition to the lower spot prices, natural gas plants are almost 50% more efficient in converting energy from the fuel into electricity, making it economically viable for electricity producers to shift to gas. Additionally, natural gas is seen as a cleaner alternative to coal, and future regulations could also catalyze a longer-term shift to gas.

Concerns Remain

Despite the seemingly compelling reasons for utilities to shift to natural gas, there are certain technical and economic issues that could be hurdles to adoption. Despite spot prices of natural gas being below $2 MMBtu, utilities have reported that their fuel costs for gas were around $3.73/MMBtu in the month of January. This made gas 14% costlier than coal, despite the higher efficiency. [2] Another technical issue is that gas-fired plants are designed to run for short periods while coal-fired plants are more suited for base load operations because of the issues involved in taking the plants offline. Because of these issues, the immediate displacement of coal seems unlikely.

While in the long-term we may see a gradual shift towards gas powered plants, that change is unlikely to result in an immediate improvement in the oversupply situation in the U.S. natural gas markets.

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Notes:
  1. Turning Away From Coal, WSJ []
  2. Is Natural Gas Displacing U.S. Coal Demand?, Mark Anthony – Seeking Alpha []
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