U.S. coal-fired power generation is set for a short-term recovery this summer as higher prices of coal’s main fossil fuel competitor, natural gas, will discourage parts of gas-fired electricity generation.
Natural gas prices are rising this year, and traded above $3 per million British thermal units (MMBtu) early on Monday, compared to less than $2 / MMBtu at this time last year. Reduced natural gas production and record-high American exports of liquefied natural gas (LNG) have fueled a rally in natural gas prices since the start of the year. The winter storms in February, which triggered the largest monthly drop in U.S. natural gas production on record, primarily due to freeze-offs in Texas, also played a part in rising natural gas prices as inventories drew down quick amid record residential consumption demand.
As a result, going into the summer months, the cost of natural gas delivered to electric generators will be nearly 50 percent higher compared to last year, the Energy Information Administration (EIA) said. That cost is expected to average $3.13 MMBtu this summer, up by 46 percent compared to the summer of 2020 and close to the price during the summer of 2018.
Soaring costs of natural gas use are set to discourage gas-fired power generation at the expense of coal and renewables, with the coal increase more noticeable, according to the EIA.
“Higher fuel costs for natural gas-fired power plants this year means that those plants will be dispatched for electricity generation less often, while coal-fired power plants will likely be dispatched more often,” the EIA said in the Summer Electricity Outlook supplement to its Short-Term Energy Outlook (STEO) in May.
U.S. electric power sector generation from natural gas during the summer of 2021 is set to account for 37 percent of total generation, down from 42 percent last summer. On the other hand, U.S. coal-fired generation will rise and hold a 26-percent share of total generation in the summer of 2021, up from 22 percent last summer. Related: Gulf Countries Are Rushing To Unload Non-Essential Oil Assets
Renewable sources are also expected to generate more electricity this summer than last summer, primarily because of the newly installed wind and solar generating capacity, the EIA said.
Despite the rise in coal-fired power generation this summer, this would not be a long-term trend, it is a short-term blip driven by the economics of natural gas.
Although coal-fired power generation this summer is set to rise, due to the fact that coal plants are now more economical to run than in previous years, coal electricity generation will still be 12 percent lower than in 2018, the EIA said.
This is due to the long-term trend of natural gas and renewable power sources replacing coal-fired share of electricity in recent years—a trend that is only expected to become stronger in coming years.
Meanwhile, natural gas prices are set to average $3.05/MMBtu for all of 2021, up from the 2020 average of $2.03/MMBtu, as per EIA’s latest estimates. Two key factors are driving this rise in prices—lower American natural gas production than in the past two record years and record-high U.S. LNG exports.
LNG exports set an all-time record in March 2021 at 10.5 Bcf/d and averaged 9.2 Bcf/d in April—the most exported LNG for those months since the United States began exporting it in 2016, according to EIA data. High prices of LNG in Asia and Europe incentivized increased American LNG exports as prices outside the U.S. remained high enough to make shipping U.S. LNG economical.
The current state of the U.S. natural gas futures also suggests tighter domestic supply, which could put further upward pressure on prices. The price spread between the first and 13th month averaged 19 cents per MMBtu in April—the highest backwardation since December 2018. Backwardation is the state of the market signaling tighter supplies with prompt prices higher than those further out in time.
Hedge funds are also bullish on U.S. natural gas prices, and they hold a large net long position—the difference between bullish and bearish bets—on gas futures and options contracts, according to exchange data compiled by Reuters columnist John Kemp.
Sustained high natural gas prices are set to incentivize higher U.S. gas production late this year and next year, but in the meantime, increased cost of natural gas generation will benefit coal use this summer.
By Tsvetana Paraskova for Oilprice.com
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