Coal-fired generation is increasingly tied to the spread between coal and natural gas prices, and small changes in price of either fuel can have significant, albeit short-lived impacts on demand, a senior S&P Global Market Intelligence analyst said Wednesday.
"The concept of the spark spread ... and the dark spread, they are a little bit dated, because these fuels affect each other so much," said Steve Piper, Market Intelligence's director of energy research, during an American Coal Council webinar.
Piper said that as the relationship between coal and gas-fired generation has deepened, modest movements in prices can create impacts on demand "almost immediately."
But if market forces widen the price disparity, the demand for the cheaper fuel "very quickly" pulls the commodities back into balance.
Piper expects that coal generation in 2017 will increase over 2016 due to higher natural gas prices, partly due to the demand growth of natural gas for power generation, which has averaged 5.6% per year since 2010.
By contrast, industrial gas demand has risen a scant 2% per year since 2010, while residential heating demand has been flat due to a series of warmer than normal winters.
As gas prices increasingly grow more reliant on power generation, this has helped tighten the spread between the two fuels.
In the East, which primarily burns bituminous coal, every 10 cents/MMBtu change in gas prices can impact roughly 4.5 million st of coal demand, Piper said. In the Midwest, which primarily burns subbituminous coal, every 10 cents/MMBtu change in gas prices can impact roughly 8.6 million st of coal demand.
"The spread dependency drives greater volatility for producers, who are going to see more year-over-year volume changes attributable to coal vs natural gas competition than organic growth or retirements," Piper said.
By 2022, Piper forecasts coal generation to dip to 28% of total market share compared to 34% in 2017, while gas climbs to 37% of generation by 2022 from 31% in 2017. This is partly based on low expectations for overall electricity demand growth, which will also constrains the growth of renewables to roughly 1% per year through 2022.
By comparison, in 2010, coal generation was 46% while gas generation was 25%.
Higher natural gas prices are expected for 2017, which help burn down what remains of the surplus coal inventories that built up in the last two years. What will remain is a coal market with average quarterly production of roughly 200 million st, Piper said.
In 2015, the US produced roughly 900 million st annually, but that number fell to roughly 730 million st last year.
"Coal producers enter 2017 with material tailwinds, with surplus inventories reduced and natural gas prices sufficiently firm to support incremental demand," said Piper. "But there is very tight interplay between [coal and gas] and the market response between them becomes quicker and quicker."
