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A step away from coal is a step in the right direction....

|Includes:Xcel Energy Inc (XEL)
Almost every article you would read over the past year on Bloomberg in reference to natural gas prices would refer to how industrial demand has fallen off.  Yet, it was rare to see a reporter mention how the electricity producers had continued to up their consumption of natural gas.  The following are a couple of trends that I've been seeing in the Electrical Power sector that I think show a very interesting move by utilities away from their old bread and butter, coal.

On Monday, the Governor of Colorado signed into law HB 1365 or the Clean Air-Clean Jobs Act.  This is a clear victory for natural gas advocates and a harsh blow to the powerful coal lobby. The bill states that coal fired power plants will have to be retired or retrofitted to dramatically reduce the amount of nitrogen oxide and sulfur dioxide and other emissions deemed to be GHG’s by the EPA. What this means is that utilities such as Xcel will have to start the process of figuring out whether it is more financially viable to retrofit its current plants into less harmful coal consumers (which is expensive) or to convert them into natural gas fired turbines (which are more efficient). The natural gas route emits ½ as much GHG’s and there is already a lot of unused natural gas power capacity that could easily be fired up(see below). The largest concern for the utilities has to be how big of a premium they will pay for their natural gas supplies over coal. Coal has historically been a far cheaper commodity per btu, but with the recent drop in nat gas prices and the fact that state and federal governments will start mandating expensive coal plant overhauls has leveled the spread in prices.  Colorado is the first state to pass any sort of energy legislation of this kind.  Other states are surely taken notice as Colorado was one of the first states to pass a law requiring a renewable portfolio standard.  Now over half of the states in the union have some form of RPS on their books.

On the same lines of pitting Coal against Natural Gas, a recent report by PFC Energy, a consultant firm, claims that America already has the capacity to switch over to strictly Natural Gas as a base load fuel.  Historically, the US Electrical sector uses most of its Nat Gas capacity to fill peak electricity demand.  The two reasons for this is that natural gas can be fired up and producing electricity in a fraction of the time coal can, and it is only used when the price of electricity justifies using the higher cost fuel. This peak electricity demand usually occurs for a few hours in the middle of the day when temperatures are the hottest, and everyone is awake and using electricity.  With depressed prices, gas is now viable as a base load generator in certain areas at all times of the day.  The report states the current utilization rate of Nat Gas plants is around 25%, while coal is around 70-75%.  So you have all this capacity that is capable of producing electricity from natural gas that is just not turned on. Meanwhile, the coal plant down the road is humming all day long and emitting twice as much GHG's.  The main thesis of the PFC report is that if we completely retire all of our coal capacity we could switch to strictly natural gas power plants and still only have them running at 72% utilization.  Of course this would take a decade or two to accomplish, but the people deciding where to put their capital at the large utilities seem to have realized this shift away from coal.  According to the FERC "State of the Markets" over 2009 there was 25,000 MW of capacity that came online via new power plants being built or expanded.  50% of that was new Natural Gas capacity while only 12% was dedicated to burning coal.  This discrepancy was largely due to the Utility sector scrapping plans for 26 coal fired generators in 2009 according to Sustainable Business magazine.  Wind for the most part took up the remaining capacity which is another story in itself.

Another piece that I want to look at is a stat that I came across when looking at the overall production of coal and natural gas for the past couple of decades.  In 2009 Natural Gas production overtook coal on a btu basis for the first time ever!  This means for the first time our country is producing more energy from natural gas than from coal.  Where is all this energy going? Well according to the FERC state of the Industry report, all of this cheap gas has been stealing the market share away from the coal plants and reducing the price of wholesale electricity by 50%!  That's coming from a government agency who's president won't even mention natural gas in a speech.

The data is also pointing to gas wanting to break out as a preferred fuel to coal regardless of the pricing environment.  Since Natural Gas has become deregulated there have only been two years where the electrical sector has used less natural gas than before.  Yet nat gas prices have risen 9 out of the last 13 years.  Whoever thinks power plants will only use more gas at lower prices is WRONG.  One of the reasons they are firing this stuff up so much faster than coal is just that, they can fire up a natural gas power plant that much faster than coal.  Building only takes about 18 months as opposed to several years, and turning on the turbines takes a fraction of time and energy as opposed to coal.  The second being that natural gas fired turbines are more efficient than coal on a btu basis.  So if coal and natural gas prices were the same, a utility would clearly chose natural gas in order to produce more KW/hour per btu. Back to the big picture of the electrical sector continually using more gas year in and year out.  These are not just small increases in consumption.  In fact when the EIA started recording data in 1997 the sector was consuming 4 Tcf per year. 13 years later we are now consuming almost 7 Tcf of natural gas to produce power.

With horizontal rigs, tailored to the larger shale wells, increasing steadily and showing no signs of slowing down I don’t see us having a problem getting enough gas to the generators. In this cheap nat gas price environment it can be assured that this new gas will get burned somewhere. And It’s becoming evident that with or without price swings in natural gas the way utilities have traditionally been producing their electricity through coal will be extremely different in another 10 years.

Disclosure: no position
Stocks: XEL