It's incredibly hard to convince someone that doesn't want to believe in something. Especially - and there are studies on this - someone that has already stated his opinion publicly. But it's not for lack of trying. Over the last week I've shown perhaps a dozen executives in the power (XLU) industry, coal (KOL) industry and natural gas (UNG) industry saying the same thing - that there's dispatch switching from coal to natural gas going on. We've also seen how EIA continues to report huge natural gas consumption growth rates for power generation, as well as concurrent drops in coal usage for the same purpose.
Using the numbers from EIA's "Electric Power Monthly" for February 2012, I'm going to take another shot showing the switch, this time using a favorite of the other side: the scatter plot.
First off, I need to caution that the numbers I'll be using are averages. These are of limited use in trying to prove anything. Each power plant has its own costs for obtaining natural gas or coal, its own heat rates, its own characteristics and operational constraints. But still, since the averages for the entire census divisions already paint a clear picture, I'll use them.
Basically in the X-axis we'll have the drop in coal consumption for power generation that took place during February 2012, versus February 2011. And in the Y-axis we'll have a ratio between the average cost of coal per BTU divided by the cost of natural gas per BTU for each census division. This will mean that the higher this ratio, the more expensive coal is versus natural gas. The values themselves are somewhat meaningless because they don't take into account the heat rates of the generators, and once again, they're averages. But still, this is what we get:
Again, the picture is what we expected in a scenario of dispatch switching. The higher the relative cost of coal, the larger the consumption drops it saw. The lower the relative cost of coal, the smaller the consumption drop it saw.
In no way am I saying that this is conclusive proof - for that, all we'd need was the word of every executive in the industry - but at least this chart might calm the concerns of those for whom only some kind of quantification can bring about peace of mind.
Finally, I must say that this process, the dispatch switching that's taking place, is hugely massive. One cannot ignore it and dismiss it. It single-handedly gave us a chance for natural gas to go up in price even during 2012 and even against record inventory levels at the entry of the injection season. Barring a mild summer, this effect all by itself should be enough to burn off the excess of natural gas, and should provide even higher prices than those existing today, in the next few months.
Additional disclosure: I am long call options on Oct $2.5 natural gas futures.