POWER January 2013 - 40

2013 INDUSTRY FORECAST
Coal Battered Early, Later Rebounds
For the first time, U.S. generation
from coal and natural gas was equal
in 2012, although just momentarily.
Gas dominated early in the year, but
as gas prices rose in response to supply
and demand forces, coal use rebounded.
Expect more of the same
give-and-take in 2013.
By David Wagman
Courtesy: TVA
T
he U.S. coal-fired power generation
industry is facing formidable obstacles
to growth-something it has long taken
for granted.
Most frequently cited is the Environmental
Protection Agency (EPA) promulgating
regulations that require expensive capital
improvements that make the economics of
continued operation of existing plants problematic
and make the building of new plants
unlikely for the foreseeable future. Another
formidable opponent is historically low natural
gas prices that have pushed coal-fired
generation lower in dispatch order in some
regions. As a consequence of those low gas
prices, reduced coal plant operating hours
and unit cycling drive up the cost of electricity
production from coal-hitting it where
it has historically been strong. In response,
some coal-based utilities are searching for
that operating " sweet spot " that is a mix of
coal- and gas-fired plants (in unique proportions),
while others have decided to permanently
make the switch from coal to gas.
40
Musical Chairs for Dispatch Orders
Natural gas-fired generation set the dispatch
order on its head starting a year ago,
when winter failed to arrive and gas prices
plunged. But gas began giving up market
share to coal during the third quarter, as
rising prices and summer demand eroded
at least some of the economic case for
coal-to-gas switching.
Natural gas, meanwhile, increased its
market share from 21.4% in 2008 to 30.6%
last year. The data make clear that the largest
shift in market share took place last
year, though the EIA anticipates coal will
regain in 2013 some of the market share it
lost in 2012.
What's more, coal-to-gas switching appears
to have limits. For example, generation
from natural gas at American Electric
Power rose around 50% year-to-date, said
CFO Brian X. Tierney during the company's
third-quarter earnings conference call.
But Tierney said that with year-to-date capacity
factors for many of the gas-fired
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plants in its eastern sector approaching
70%, and with the recent increases in
forward natural gas prices, the ability for
more coal-to-gas switching is minimal.
Switching for Profit
Coal-to-gas switching in 2013 seems unlikely
to hit levels reached last spring when
a warmer-than-normal winter led to a massive
overhang of natural gas supply as record
natural gas production pumped more supply
into the market. Prices plunged as a result,
making it economical for power plants from
the East Coast to the Deep South to switch
from coal to natural gas for power generation.
Even coal produced from the historically
low-cost Powder River Basin in Wyoming
was displaced as far west as Wisconsin and
Minnesota. In response, natural gas producers
exercised market discipline and slowed
development and production.
The Energy Information Administration
(EIA) projected in November that higher
natural gas prices will contribute to an 11.2%
POWER | January 2013
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POWER January 2013

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