Coal Expected to Outstrip Gas for Electricity Burn this Winter
EIA’s November Short-Term Energy Outlook (STEO) is currently predicting that the share of U.S. electricity fueled by coal will begin growing, compared to last year. The share of generation from natural gas is expected to decline year over year, lower than coal in the months of December, January, and February. This prediction is based on expected temperatures and market conditions.
Natural gas-fired generation surpassed coal-fired generation for the first time in April 2015 and has held the top spot since. Natural gas generation reached record levels this past summer and supplied 36% of total U.S. electricity generation during the first six months of 2016, while coal supplied 31%.
Coal or Gas?
When available generation capacity exceeds electricity load, the decision over which type of capacity to run often reflects relative operating costs, which are largely due to fuel costs. In terms of the fuel costs required to generate one megawatt hour of electricity, the prices for natural gas and coal were relatively competitive in 2015. Through the first half of 2016, the national average price of natural gas per MWh was consistently below the cost of coal delivered to power plants due to full inventories and a mild winter.
Gas reached a low point of about $16/MWh in March while coal has held relatively steady in the range of $21/MWh and $23/MWh for the past two years. Spot market and contract purchases of natural gas deliveries to electric generators have been increasing in recent months however, with gas and coal prices virtually even in August. The generation cost of natural gas averaged $21.30/MWh that month.
It All Comes Back to Weather
EIA projects that natural gas prices delivered to the power sector will continue rising, with average natural gas generation costs peaking at $31/MWh in February. This would be 40% higher than the projected national average coal costs for that month. Coal costs differ across regions, however, meaning that different markets will likely see different amounts of switching.
If gas is more expensive for plants than coal, more coal will be used for electricity generation. Forecasts are currently calling for cooler winter temperatures in coal dominant areas, further contributing to higher use projections. A scenario of warmer winter temperatures would cause inventories to swell and likely keep natural gas prices from rising, barring a major drop in gas production, thus reducing the incentive to burn coal.
