Friday, April 26, 2013

And the Pendulum Swings Back to Coal...

Yep, I think we all saw that coming.  Natural gas prices have spent nearly the entire month of April above $4/MMBtu.  That's good news for gas fans, but it means that utilities are going to stop using gas in place of coal for the time being.  Gas will still be burned, but the switching from coal that saved natural gas in recent years will no longer be a factor.  In recent years, utilities have driven considerably higher natural gas consumption, which helped set a floor under gas prices when a combination of overproduction and depressed fundamental consumption drove gas storage levels to record highs for several consecutive years.

But with rising gas prices, the pendulum swings back to coal.  At somewhere around $4 coal becomes more economical on a marginal cost basis for to burn.  In a recent story, American Electric Power's CEO noted in a recent article that the company's use of coal has picked up considerably recently:
"Right now, the company’s coal plants are operating at about a 65 percent 'capacity factor,' which refers to how much energy was generated compared with the maximum possible; AEP’s natural-gas plants are operating at about half that level, which is almost a complete reversal from last year at this time..."
It will be interesting to watch the upcoming EIA working gas in storage reports as higher prices and normal spring weather begin to impact consumption trends.

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