“Cheap natural gas is killing coal.” While that headline has been written dozens of times over the last few years, it continues to be true. In fact, natural gas has become even cheaper over the past year, and the slow death of coal is poised to accelerate.
In a new report from Moody’s, and reported on by SNL, the ratings agency predicts that cheap natural gas could lead to another massive wave of coal-fired power plant closures over the next year and a half.
Coal has been in decline for quite a while. The shale gas revolution that began about a decade ago sparked the first wave of coal retirements. Environmental regulations, including rules on mercury and carbon emissions, are locking in those losses, with almost zero chance of a recovery for coal’s share of the electricity market. Still, the decline was supposed to be somewhat gradual, if painful.
However, natural gas prices have plunged to their lowest levels in almost two decades over the past year, deepening the pain for coal miners as coal becomes increasingly uncompetitive. With Henry Hub prices below $2 per million Btu (MMBtu), owners of coal-fired power plants are having trouble justifying keeping their plants open. Related: 70-90% Decline In Well Completions Raises Hope For Oil & Gas
That is because, as Moody’s notes, natural gas often determines the marginal price of electricity. The price set in the market – in unregulated markets, that is – is the price that all generators earn. In other words, cheap natural gas is lowering the price of wholesale electricity, which is cutting into the revenues of all power plant operators.
"Low natural gas prices have devastated most of the US merchant power sector because gas-fired power plants often serve as the marginal plant during times of peak power demand," Moody's said. "Lower natural gas prices have effectively driven down wholesale power prices for all generators, regardless of whether they are using natural gas, coal, nuclear power or renewable resources to generate their electricity."
Of course, lower wholesale electricity prices hurt gas-fired power plants as well, but the low prices are “most harmful to coal-based generators and to a lesser extent nuclear-based generators.” Related: Oil Up As Bullish Sentiment Returns To Markets
If prices don’t rebound, a lot of coal-fired power plants could be killed off. "In the current commodity price environment, most unregulated coal and nuclear plants are generating little or negative cash flows," Moody's said. "We believe that if the current gas price environment of $2/MMBtu to $3/MMBtu does not improve in the next 12-18 months, there could be more large-scale coal and nuclear plant closures, especially in regions without a forward capacity market, such as Texas and the Midwest."
The EIA predicted in March that natural gas’ share of the electricity market would surpass coal for the first time in 2016, a trend that could pick up pace by next year.
Much depends on the price of natural gas, and looking at the data, the supply/demand picture looks pretty bleak. The U.S. just emerged from “withdrawal” season, when high winter demand means storage levels decline as Americans burn through gas to heat their homes. But the winter was a mild one – the U.S. is entering “injection” season with storage levels 54 percent higher than the five-year average for this time of year. Warm winter temperatures combined with high natural gas production resulted in much higher natural gas in storage than usual, which helps explain why prices are at their lowest levels in years.
The WSJ reported that speculators are betting that natural gas prices are near a bottom, and that prices could rebound significantly because of a rash of bullish factors. Related: The Wireless Tech That Will Transform The Energy Industry
First, although winter in the U.S. was rather mild, spring is getting off to a late start. Cooler-than-average temperatures have descended upon much of the Midwest and East Coast. The cool temperatures could last through mid-April, leading to very light gas storage injections for the month. Next up, the summer could be hotter than normal as La Nina hits and brings hot temperatures to central and eastern regions of the United States.
Finally, natural gas production is actually starting to decline. With natural gas prices so low, producers are cutting back severely on drilling. The natural gas rig count is down to 89, which is roughly one-quarter of the number of rigs in operation at the end of 2014. As a result, output is falling – the prolific Marcellus shale is expected to lose 60 million cubic feet per day in May, with all the major shale basins expected to see a decline of 491 million cubic feet of gas per day.
Coal producers are hoping that all of that adds up to a rise in natural gas prices, which could buy coal-fired power plants just a little while longer. If not, a wave of coal plants could be shut down over the course of this year and next.
By Nick Cunningham of Oilprice.com
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