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Natural Gas Is Pushing Coal Over The Cliff

testosteronepit's picture





 

Wolf Richter   www.testosteronepit.com

Natural gas may well be the most mispriced commodity these days. Its price has been below the cost of production for so long that the industry is suffering serious consequences with billions of dollars in losses—dolled up as “non-cash accounting charges” as to be ignored by “analysts.” The more leveraged players are trying to keep their chin above water by selling priced assets.

There has been a mad scramble to abandon drilling for dry natural gas, and what little drilling still takes place is focused on wells that also produce oil or gaseous liquids. Countless wells have already been drilled and could produce but have not been brought on line due to pipeline constraints or local prices that have collapsed [read... The Coming Unholy Alliance in Natural Gas].

And yet, even that mayhem hasn’t been enough to push the price above the cost of production. But production is now finally tapering off from record highs on a week-to-week basis, though it’s still above last year’s level. Storage levels are high for this time of the year, but are rapidly regressing towards the mean due to soaring demand, driven by the hottest July on record and power generators that have switched from coal to gas due to price. But this is just noise as natural gas continues its relentless conquest.

It started in the 1990s when highly efficient natural gas combined-cycle (NGCC) turbines arrived on the scene. For the first time, gas was able to compete with coal on cost. By 2000, there was a building boom of NGCC plants underway that, over the next ten years, nearly doubled the natural gas-fired generating capacity. And every one of these plants helped natural gas gain ground on coal.

And during the first six months of 2012, 165 power generators came on line with a total capacity of 8,098 megawatts (MW), but only one was a coal-fired plant. At 800 MW, it’s less than 10% of total capacity added. The remaining 90% were gas-fired generators and renewables, including solar and landfill gas, which tend to be small—hence the large number of generators.

Coal plants are shut down at a stunning pace. In 2012, a total of 9 gigawatts (GW) of coal-fired capacity will be retired, the largest one-year exodus in the history of the US! In 2015, a new record: 10 GW. Between 2012 and 2016, 175 coal-fired generators with a total capacity of 27 GW will get axed—8.5% of the total coal-fired capacity.

Each wave is comprised of the oldest and most inefficient units. At the same time, the few coal-fired generators coming on line are much more efficient and burn significantly less coal than the capacity they’re replacing. A double whammy for coal demand.

And here is where the hapless retirees are:

The reason: cost. More precisely, variable operating cost, an important factor in deciding which power generators to operate to satisfy a given demand. Generators with the lowest variable operating costs are dispatched first. Older inefficient coal plants are more expensive to operate than new coal plants—and more expensive than NGCC plants, even if the price of natural gas were higher. But there are other costs as well, such as complying with the Mercury and Air Toxics Standards. Smaller, older, inefficient units are not worth upgrading. And natural gas, being a cleaner-burning fuel, doesn’t have these issues.

Coal-fired plants are geezers: they were built during the halcyon days of King Coal before 1980. Back in 2010, 73% of the capacity was over 30 years old, while most gas-fired capacity was less than 10 years old.

Coal is a commodity whose demand in the US is being strangled powerplant by powerplant, and at an accelerating rate. Even a surge in the price of natural gas—and there will be one—will only fiddle with the numbers at the margins. A dire situation for coal in the US market. Read... Natural Gas And The Brutal Dethroning of King Coal.

Commodities like oil, gas, and coal too risky? Prefer the safety (and tax-free income streams) of municipal bonds? Read this..... Did Warren Buffett Sell Munis On Inside Information?

 


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Tue, 08/21/2012 - 16:57 | Link to Comment AGuy
AGuy's picture

One very import factor that this article mised: Regulation! Power companies are shutting down Coal fire plants because of the new tough emissions, not because of the cost of NatGas.

Most of these plants are older plants that would be too costly to upgrade to met the new emission standards. Some of these plants were standby\backup plants designed to pick up load during maintaince of other plants or to meet peak demand during summer months. While some producers are building new NatGas plants for replacements, others are not replacing them. This will likely drive up power costs and may result in rolling blackouts in the future.

Another issue not often discussed is water. Coal Plants do need a lot of water to operate. Nat Gas power plants usually have a much smaller demand for water. The plant foot print for NatGas is usually much smaller since there is no need to stockpile a months supply of coal on site, a rail line to bring in the coal. Just a gas pipeline.

Tue, 08/21/2012 - 15:10 | Link to Comment JohnKozac
JohnKozac's picture

King Coal won't die that easily.

Tue, 08/21/2012 - 15:49 | Link to Comment Sofa King Confused
Sofa King Confused's picture

China and India will buy it as fast as you can ship it.

Tue, 08/21/2012 - 14:36 | Link to Comment doubledutch
doubledutch's picture

More proof ,energy in general is because of ''green''insanity'' way to expensive and killing the consumer,businesses,is the  real economy,..

And peak oil is with the related CO2 story a lie.

Tue, 08/21/2012 - 14:36 | Link to Comment onlooker
onlooker's picture

 

I talked to a man who is in the Texas electric production industry. The rate caps are being increased over the next few years at 50 and 100 % numbers—to entice investment in the electric generation industry. Emission control agencies increases the emission requirements yearly. Plants that fail are closed. Those that squeak by are not updated but closed when they fail. Closed plants are not moth balled to revive in emergency.

 

Electric rates in Texas will go up 100% and then 50 to 100 percent.

Tue, 08/21/2012 - 14:10 | Link to Comment Trying to Understand
Trying to Understand's picture

http://www.bloomberg.com/news/2012-08-21/u-s-appeals-court-overturns-cross-state-air-pollution-rule.html

"Obama Curbs on Coal Pollution Rejected by U.S. Court"

NG may fall again...

Tue, 08/21/2012 - 16:14 | Link to Comment Alea Iactaest
Alea Iactaest's picture

This.

I read the article before heading over to ZH, wondering what commentary I would find. (im)Perfect timing Wolf? I like your stuff but coal is not going away soon. Even if coal gets killed in the US -- a questionable assumption at this point -- there are a couple of other countries not ready to give up on it.

I bought some Jan-13 $30 calls as a total flier when BTU went below $20. At this point I'm trying to decide whether to sell them or hold as a bet on Mittens squeaking by in November. I didn't sell today out of greed, but I probably will just keeping my "profit" on the table. Late November could see $30 well ITM.

Tue, 08/21/2012 - 13:57 | Link to Comment klapper
klapper's picture

Recently, Germany added 2 lignite fired units with 2200 MW capacity. This new powerplant is a super critical plant with 43% efficiency. I commented on coal plants fired with Powder River Basin coal being roughly 30% the energy operating cost of a NGCC power station in the last "coal is dead" article on ZH. That was based on 60% efficiency for the NGCC station and 35% efficiency for the coal fired station. However, if 43% is the new efficiency number, and I reduce the predicted efficiency for NGCC to 51% then a new coal fired plant using PRB coal (the Ohio barge terminal futures price) vs NG (Henry Hub futures price), the energy cost for coal power generation using PRB coal is 20% of NG. If NG rises to $7/GJ the ratio is 13:1 in favour of PRB coal as the generator energy source.

Capital cost for the new German plant was allegedly $2.8B (=$1300/kW), however since it was an addition to existing power infrastruction the cost is lower than a scratch built coal fired plant. Even so, given the relative price stability of thermal coal vs NG, it's hard to take the premise of this article seriously, unless of course you factor in climate change angst. Hard to say where we are going with that issue.

Tue, 08/21/2012 - 13:42 | Link to Comment diogeneslaertius
diogeneslaertius's picture

you will pay more for energy and get less of it AND YOU WILL LIKE IT

but the logistics...

 

SHUT UP SLAVE!

Tue, 08/21/2012 - 13:25 | Link to Comment divide_by_zero
divide_by_zero's picture

Obama's EPA war on coal not helping it much either, even with scrubbers etc not gonna get a permit.

Tue, 08/21/2012 - 14:57 | Link to Comment Jim B
Jim B's picture

Our local utility is retiring a couple of coal plants because of the EPA! Period! 

Tue, 08/21/2012 - 13:22 | Link to Comment NEOSERF
NEOSERF's picture

Agree but King Coal will rise again, once oil hits $150 and natgas producers get back to $10, coal will look like a bargain...sometime before the decade is through.  In the meantime, the US better figure out how to protect this asset as China and India will come in and buy up these companies in a heartbeat and if we disallow it, expect economic retaliation.

Tue, 08/21/2012 - 14:55 | Link to Comment Dr. Kenneth Noi...
Dr. Kenneth Noisewater's picture

How much does it cost to gasify coal to NG?

Tue, 08/21/2012 - 15:40 | Link to Comment css1971
css1971's picture

More likely to go to syngas (hydrogen and carbon monoxide mix) rather than natural gas.

Tue, 08/21/2012 - 13:35 | Link to Comment Gromit
Gromit's picture

Yes exactly, and we'll export to China in the meantime.

Tue, 08/21/2012 - 13:45 | Link to Comment diogeneslaertius
diogeneslaertius's picture

bingo, you nailed it

in and beyond the energy pipe what we are ALLOWED to produce (esp. of our really high-grade coal as well...)

you will go bankrupt trying to actually run the infrastructure supply and produce side

and where is the steel ending up gentlemoooon

 

NM JUSTIN BIEBLER IS ON DANCING WITH THE KARDASHIANS XD

Tue, 08/21/2012 - 13:21 | Link to Comment malikai
malikai's picture

Coal plants are shut down at a stunning pace. In 2012, a total of 9 gigawatts (GW) of coal-fired capacity will be retired, the largest one-year exodus in the history of the US! In 2015, a new record: 10 GW. Between 2012 and 2016, 175 coal-fired generators with a total capacity of 27 GW will get axed—8.5% of the total coal-fired capacity.

I wonder what that 27GW will be replaced with. There's only so many landfills and the production curve for fracked wells is too steep to be logical in the long term. Not to mention that if we're going to see 4Mb/d out of Athabasca, we're going to have to be sending them a whole lot of gas to do it.

Tue, 08/21/2012 - 17:05 | Link to Comment AGuy
AGuy's picture

"I wonder what that 27GW will be replaced with [for the long term]"

Washington and Wall street have the attention span of a fruit fly. All that matters is the next Quarter or the next November. If it beyond either of those time periods they could give two sh#ts! When shortages happen the politicians will blame it someone, just not themselves. Wall street use it as an opportunuity to raise costs on consumers. Everyone wins except the common american worker!

 

 

Tue, 08/21/2012 - 13:11 | Link to Comment kaiserhoff
kaiserhoff's picture

Well said, and another good reason for reading ZH.

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