Coal in a World of Cheap Natural Gas

Michael Giberson

Natural gas has become cheap enough relative to coal that some gas-fired electric generators are able to underbid baseload coal generators.  Market-based switching from coal power to gas has increased demand for gas by three billion cubic feet per day according to a Merrill Lynch analysis cited in the Wall Street Journal today. Bad for coal companies, but good for electric power consumers. More:

“There basically is no spot market for coal right now,” adds Jim Thompson, managing editor of the Coal and Energy Price Report in Knoxville, Tenn., a coal-industry newsletter. “Coal companies are living off their utility contracts.”

Utilities mostly obtain coal through multiyear contracts. As a result, even though spot coal prices have fallen, prices paid by utilities are expected to rise 2% this year to an average of $2.11 per million BTUs. Next year, the EIA expects coal prices to dip slightly to an average of $1.91 per million BTUs.

Those numbers suggest coal is still about half the price of natural gas. But the numbers can deceive. Gas-fired power plants convert fuel into electricity more efficiently than coal units, and it is cheaper to move natural gas than coal. As a result, gas can still have an advantage over coal even if the commodity cost is higher.

In related analysis, a paper by Maria Kozhevnikova and Ian Lange, forthcoming in the Review of Industrial Organization, explains why contract lengths for coal purchases are decreasing. Short version: “increased alternatives reduces contract duration.”