While the economics for natural gas-fired power plants to displace coal-fired power plants remain strong, the actual displacement level is affected by more than simple economics. Barclays Capital estimates that if the decision was merely an economical one, then gas could displace up to 30 billion cubic feet per day (Bcf/d) of coal with a price of $2.50 per million Btu. However, the investment firm estimated that the actual displacement figure is roughly 10 Bcf/d.
Coal displacement is set by the amount of underused gas-fired capacity. While the average gas-fired unit ran about 30% used in 2010, the firm noted that power operators are not capable of switching freely between coal and gas because many coal-fired plants have long-term contracts for coal. Many operators choose to utilize these deliveries when it has a higher price than gas because of the lack of a coal spot market that limits resale opportunities. In addition, plant operators must secure steady supplies of natural gas and without the proper transportation systems in place this may necessitate the continued use of coal-fired plants in some locations.
“We believe that the eastern power markets will see an increase in coal displacement, but will be bumping against an effective limit of displacement, at about 5 Bcf/d on an annual average basis. Taking into account the installed base of coal capacity and the amount of gas-fired capacity which can displace it, the Midwest and Texas markets could contribute a little over 3 Bcf/d followed by a little under 2 Bcf/d in the West,” according to Barclay’s Capital’s Gas and Power Weekly Kaleidoscope for the week of March 13.
In the future, these figures will increase as plant operators become more familiar with utilizing gas-fired generation as the primary baseload. The advent of shale gas has lowered the price to the point that gas prices have become very competitive with coal prices. Barclays Capital found that the Southeast and Northeast should see the largest drop in coal-fired market share due to the greater cost of coal in those parts of the country.
Since 2009, the Southeast has been the region with the largest amount of displaced coal because of the higher prices in the region compared with other parts of the country along with a large number of both coal- and gas-fired power plants.
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