Natural gas may soften the blow of declining coal prices

February 28, 2011

Natural gas may soften the blow of declining coal prices

By Taylor Kuykendall Register-Herald Reporter The Register-Herald Mon Feb 28, 2011, 12:02 AM EST

BECKLEY — Diversification of the state’s energy market could guard West Virginia from a predicted decline in coal prices.

The state currently produces more than 10 percent of the coal produced nationwide. The state also ranks second in the nation in interstate sales of electricity, according to the U.S. Energy Information Administration.

In 2009, the EIA reports, West Virginia had 50,602 wells producing natural gas, about 10.3 percent of the total across the U.S.

Increasing diversity in the West Virginia economy prevents the state from relying on the health of the coal industry.

Bill Powers, editor of Powers Energy Investor, wrote in a February issue that an “anomaly” of the gas industry over the past year is that it has been disconnected from “close substitutes” like oil and coal.

“Changes in environmental regulations that favor use of natural gas over coal as feedstock for electricity generation facilities, coupled with a spike in coal prices, have caused natural gas to trade below the “coal floor” for more than a year,” Powers wrote. “The coal floor is the price at which electrical utilities shut down coal plants and increase use of natural-gas-fired power plants.”

Many power plants can choose to burn coal or natural gas.

Powers added that, increasingly, plants are using more natural gas.

“A number of factors have distorted the traditional relationship between coal and natural gas prices to unsustainable levels,” he wrote. “Since most of America’s utilities have the ability to employ natural gas-fired power plants in lieu of coal-fired power plants, when natural gas is priced advantageously, utilities have been ramping up natural gas consumption and reducing their usage of coal.”

Powers wrote that he expects a “spectacular rally” in natural gas.

The EIA projects that while coal is still the dominant energy source for electricity projection, natural gas will increasingly become the fuel of choice.

“Coal remains the dominant energy source for electricity generation because of continued reliance on existing coal-fired plants,” the early release of the EIA Annual Energy Outlook 2010 states. “The EIA is not projecting any new central station coal-fired plants, however, beyond those already under construction or supported by clean coal incentives.”

EIA projections predict natural gas prices will remain under $5 per thousand cubic feet through 2022 but will increase significantly as more shale wells are required to meet demand. The price of coal, however, appears to be on the decline.

“After peaking in 2010, the average U.S. minemouth coal price declines gradually as higher-cost coal from mines in Appalachia, particularly Central Appalachia, is displaced with lower-cost coal from other U.S. coal basins,” the EIA reports. “After 2016, a leveling off in Appalachian coal production combined with growth in coal demand results in a gradual rise in coal prices through 2035.”

The EIA’s predicted decline in coal consumption is mostly based on lower natural gas prices that encourage development of natural-gas-fired plants.

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