For many years, gas-fired power plants have relied on declining coal-fired capacity and generation to grow market share. However, that so called ‘coal-to-gas-switching’ has reached its limit. Increasingly, the US’ coal-fired generation is being consolidated into a smaller number of economic plants that are not as sensitive to fluctuating fuel prices. In today’s Energy Market Insight, we’ll look at these changing coal-fired generation dynamics and what they can tell us about the potential growth of gas-fired generation.
Coal generation has been on the decline since the US shale revolution drove natural gas prices to lows unseen before. Increased competition from more economic gas generation, alongside growing operational costs and liabilities, drove coal generation down more than 50% over the last decade. As the least economic coal plants dropped out of the stack, generation became consolidated in fewer and fewer plants. For the remainder of this analysis, I will categorize the US’ remaining coal fleet into two categories: the Top 50, which are the fifty coal plants that have had the most market share in the last year, and the Non-Top 50, which are all other operational coal plants. The graphic below shows the growth of the Top 50 coal plants’ market share, now comprising about 55% of all coal generation, compared to the remaining 170 plants that account for the rest of the US’ coal-fired generation.
The plants in the Top 50 have shown themselves to be mostly inelastic to fuel prices. Inelasticity or elasticity, in this case, refers to how a plant’s generation changes as its input costs, which are fuel costs only for this analysis, change. A plant that is more elastic will generate more if fuel prices fall or less if they rise. A plant that is inelastic shows less sensitivity to fuel prices, generating a mostly consistent amount regardless of fluctuations in prices. For example, the Top 50 coal plants have shown a decline in generation of 10% in the face of fuel costs moving drastically out of their favor. Non-Top 50 plants have shown much more extreme changes, dropping 50% over the same time period, as shown in the graphic below. The solid red line shows the spread between coal and gas fuel costs. When the red line is positive, gas prices are more economic than coal, and when it is negative, coal prices are more economic than gas. It is worth noting that a blended US coal price and Henry Hub gas price was used, meaning that unique regional pricing dynamics are lost.
So, with coal plants now sitting in these two camps, inelastic and elastic, what does that mean for coal to gas switching going forward? It has become increasingly difficult to push coal-fired generation out of the stack based on economics alone. Instead, social and political pressures are playing larger roles in forcing plants to retire. Currently, more than half of the US’ coal fleet has announced retirements, with many of the Top 50 among them. The map below shows all the coal plants in the US. Red dots are those plants that are part of the Top 50, and blue dots represent Non-Top 50 plants.
While the graphic above shows total announced retirements for the US’ coal fleet, those retirement dates range drastically from this year all the way to the 2050s. Strategies to backfill lost generation also vary widely across the country; natural gas will not always be the winner. Request a demo of BTU’s Power View to see more information on when these plants will retire and how they will be backfilled.
BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.
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