In Appalachia, coal struggles to compete with cheap natural gas


Coal (KOL) has regained a little ground this year as the fuel of choice for U.S. power plants, but not in Appalachia, where natural gas for electricity generation has become very cheap.

So much gas is being pumped from the Marcellus Shale, and so few pipelines serve the area, that a glut has developed in Pennsylvania and West Virginia, driving down the price of electricity and making it hard for coal to compete, WSJ reports.

FirstEnergy (FE) stopped generating power in October at two plants in the area, and AES has told regulators it may close its Beaver Valley coal plant near Pittsburgh; analysts think more closures are likely in the region.

As natural gas prices have crept up closer to $4/M BTUs, coal recovered some of its market share, but gas in Pennsylvania is going for as low as $1.83; the longer gas and electricity prices stay low, the more likely it is that commercial coal plant owners could shut plants or file for bankruptcy.

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Comments (14)
  • BermudaHigh
    , contributor
    Comments (571) | Send Message
     
    This note includes a number of inaccuracies and shows complete lack of understanding of power market fundamentals in the Northeast.

     

    - Beaver Valley is a nuclear power plant and no one is thinking about closing it.
    - Large supercritical coal plants in PA and WV will not be closed because the PJM transmission grid is built around them. These plants will be on even if gas goes to 0.
    - In addition, there is insufficient combined cycle generation capacity in the region to displace any but the most inefficient coal power plants
    - Natural gas in PA is not $1.83. Please review the report below and educate yourself. The lowest priced point - TGP-Z4 Marcellus was $3.04 / MMbtu for weekend and Monday delivery.
    http://bit.ly/18OwLpy

     

    Seeking Alpha's bias against coal and coal generating utilities like FE has been obvious for a long time...I find it strange though that poor analysis such as the note above doesn't get filtered out. Please do proper research so that you do not inadvertently (or maybe intentionally?) mislead your readers.
    29 Nov 2013, 09:12 PM Reply Like
  • G. Frieberg
    , contributor
    Comments (187) | Send Message
     
    Hmmmm. I live in Ohio, and I see very little of my regional power grid being generated by NG. While I admit central Appalachian coal producers are hurting right now (e.g. witness James River's troubles, and the bankruptcy of Patriot a whle back), the overall use of coal will be enormous globally, and there is huge opportunity for producers, particularly those with Powder River Basin assets. Even if one considers the relative abundance of NG, one must also consider the billions of dollars that would have to be invested in physical plant to allow a significant ramp up in NG generation. I believe for those investors with a longer time horizon would be well rewarded to have some coal in their portfolio, such equities as BTU or ACI (both pay divi's), or possibly KOL which has global exposure. The "death of coal" rants I read are simply ludicrous. Yes, the RATE of increase in production of coal has declined, but the overall demand is still INCREASING.
    30 Nov 2013, 08:49 AM Reply Like
  • Red Raider
    , contributor
    Comments (218) | Send Message
     
    Sorry Bermuda,

     

    You have at least one of your alleged inaccuracies wrong. Of course the Beaver Valley nuke is a nuke. The author is discussing the coal plant at Beaver Valley as he clearly stated. It is really there! Almost next to the nuke.

     

    The price of nat gas is driven by supply and demand for the future. There may well be special circumstances when a producer will sell at a bargain spot price to avoid shutting in his wells. It seems probable that Marcellus production has surpassed pipe line capacity. If so, the extremely low price of gas will correct itself when new pipelines are completed.

     

    The bias against coal certainly doesn't come from Seeking Alpha!. Have you heard of Gina McCarthy? If not, you most certainly will. Your government in Washington has decided to outlaw coal as a fuel for utility power plants. It is taking them a little while, but chances are they will get there.

     

    As for the PJM grid, we may need a little more homework there too.

     

    Certainly the grid was / is built to spread the basic supply of electricity throughout the PJM area, and to import power when needed from the surrounding grids. Virtually all of the continuous demand for power is supplied by the most economic operators, fuel cost being the primary consideration for dispatch of base load capacity. Historically, this demand is served by nuclear, coal, and maybe a tiny bit of hydro. Recently gas turbine combined (Brayton and Rankine) cycle plants that operate with 60% thermal efficiency (vs 35% for coal) have been built at lower capital cost than coal or nuclear. These units will fill the base load capacity requirements as the EPA regulations kill King Coal.

     

    By the way, your government has forced many power generators (and maybe PJM?) to generate power from wind and solar. These units are classified "Must Run" when they are available, day or night regardless of most grid conditions. They are available about 30% of the 8,760 hours in the year. This generation also cuts coal consumption. For the most part, when they are unavailable (70% of the year) their capacity is replaced by nat gas fuelled gas turbines.

     

    Hopefully this little tutorial will help us gain a better understanding of the King's terminal illness.

     

    30 Nov 2013, 01:05 PM Reply Like
  • BermudaHigh
    , contributor
    Comments (571) | Send Message
     
    Thanks Red Raider, I stand corrected on the Beaver Valley plant - I was going off memory there from my electricity trading days when we only cared about the large units. There is indeed a coal plant at Beaver Valey with a nameplate capacity of whapping 120-ish MWs. Obviously, closing that wouldn't result in the demise of the coal production and power generation industry, and hardly a reason for SA to mention the word "bankrupt".

     

    The SE note was based on a WSJ article but quoted the article incorrectly and incompletely. The full article is here:
    http://bit.ly/1j9yI3N

     

    You are of course correct about CCs having higher thermal efficiency than supercritical coal...no one is arguing here. What I am saying is that there isn't enough CC capacity in WV and PA to absorb the very localized gas oversupply.

     

    I disagree with you on the impact of increasing "must run" generation. Remember why PJM has to do this...for voltage reliability as the grid backbone was built assuming heavy West - East transfers. Because of that, as well as other reasons such as slow coal unit start-up times, high shut-down costs, etc., they have to keep about 5,000 - 6,000MW of uneconomic coal units on every day - effectively burning coal uneconomically and reducing the amount of coal to gas switching that someone would expect at the current gas prices.

     

    I can guarantee you that PJM will be running Conemaugh and Keystone for example even if the unfortunate gas producers in the Marcellus have to dump the gas for a penny.

     

    And yes, the situation with the EPA and their enironmentalist agenda is unfortunate. But that may be change...last time I checked our leader wasn't doing so well in the polls. Imagine the stampede out of coal and coal utility shorts if the Dems lose control of the Senate next year. Anyway, getting political so I will stop. Thank you for the comment though.
    1 Dec 2013, 08:57 PM Reply Like
  • BermudaHigh
    , contributor
    Comments (571) | Send Message
     
    Red Raider, I had misunderstood you comment about the must-run generation. Now I see that you are talking about wind. Wind has indeed taken a little share away from coal in PJM but that has manifested itself mainly in the Comed area, and during the night. Because of transmission constraints going East, this has sometimes resulted in negative electricity prices there during the nights in the shoulder months.

     

    Today, for example, the peak wind generation across the PJM footprint was around 2,500MW around midnight, and dropped to only 300MW during the middle of the day.

     

    Considering the massive capital requirements to build wind generation and the transmission constraints, as well as concerns over wildlife (hundreds of thousands of birds are killed every year), I don't hear anyone getting excited right now about further investment in the sector.
    1 Dec 2013, 09:19 PM Reply Like
  • Red Raider
    , contributor
    Comments (218) | Send Message
     
    Thanks Bermuda,

     

    I am not familiar with the PJM specifics so I will defer to your wisdom. Did not realize they were light on combined cycle plants.

     

    The must run comment was meant to reflect what I believe is fact, that wind and solar must be connected to the grid whenever available. Reasonable, given that fuel cost is about $0.

     

    Of course we often have to run inefficient coal and simple cycle turbines to cover potential loss of wind and solar.

     

    I doubt the senate can do much about the anti coal regs. Even if the dems lose it. They new senate would have to ammend the clean air act to curb EPA regs. I expect the shorts will be OK.
    3 Dec 2013, 01:06 AM Reply Like
  • Red Raider
    , contributor
    Comments (218) | Send Message
     
    Thanks Bermuda,

     

    I am not familiar with the PJM specifics so I will defer to your wisdom. Did not realize they were light on combined cycle plants.

     

    The must run comment was meant to reflect what I believe is fact, that wind and solar must be connected to the grid whenever available. Reasonable, given that fuel cost is about $0.

     

    Of course we often have to run inefficient coal and simple cycle turbines to cover potential loss of wind and solar.

     

    I doubt the senate can do much about the anti coal regs. Even if the dems lose it. They new senate would have to amend the clean air act to curb EPA regs. I expect the shorts will be OK.
    3 Dec 2013, 01:07 AM Reply Like
  • Red Raider
    , contributor
    Comments (218) | Send Message
     
    Thanks Bermuda,

     

    I am not familiar with the PJM specifics so I will defer to your wisdom. Did not realize they were light on combined cycle plants.

     

    The must run comment was meant to reflect what I believe is fact, that wind and solar must be connected to the grid whenever available. Reasonable, given that fuel cost is about $0. 2,500 Mw? Looks like things are getting out of hand! What is the subsidy for wind generation? I thought it was $0.02 per Kw - hr. but memory fades in retirement.

     

    Of course we often have to run inefficient coal and simple cycle turbines to cover potential loss of wind and solar.

     

    I doubt the senate can do much about the anti coal regs. Even if the dems lose it. They new senate would have to amend the clean air act to curb EPA regs. I expect the shorts will be OK.
    3 Dec 2013, 01:14 AM Reply Like
  • BermudaHigh
    , contributor
    Comments (571) | Send Message
     
    I wouldn't call PJM light on combined cycle plants...just that those in the Marcellus area are insufficient to displace much of the coal even at very low gas prices.

     

    Also, keep in mind that NG is going up in price, we almost reached $4 at the Hub yesterday, as we will be below the 5-year average in storage by the end of December. I think that is very bullish coal.
    3 Dec 2013, 09:01 AM Reply Like
  • spinrbait
    , contributor
    Comments (684) | Send Message
     
    is this news suggesting fe could possibly go bankrupt. i am confused by some of the wording.
    30 Nov 2013, 09:11 AM Reply Like
  • Ninja Trader
    , contributor
    Comments (1755) | Send Message
     
    Bankrupt - no. I think any bad news is already priced into FE as evidenced by the $6 drop these past 2 weeks. The 2 commentors above you sound very knowledgeable. The entire energy sector is overdue for a rebound.
    30 Nov 2013, 09:57 AM Reply Like
  • Mike847
    , contributor
    Comments (64) | Send Message
     
    The decline of US coal has been primarily caused by the collapse of US natural gas prices since 2012.

     

    However current natural gas prices are not profitable for most oil and gas producers. Take a look at the recent Ultra Petroleum (UPL) quarterly conference call transcript for a discussion about the economics of natural gas drilling including the Marcellus.

     

    Basically higher natural gas prices are needed to maintain the current levels of US natural gas production considering the depletion rates of shale wells.

     

    In the Marcellus, the 2013 production boom results from the drilling surge of the past several years with a backlog of previously drilled and capped wells being brought into service as pipelines reach the wells. Until prices go higher, the producers are not planning to drill many new wells so depletion can reduce total Marcellus output beginning in 2014.

     

    Once natural gas prices rise about $5 mmBTU sometime in the near future, then the economics of coal versus natural gas for electricity production will shift in favor of coal (even CAPP).

     

    Exports of natural gas to Mexico via pipeline and LNG worldwide can increase natural gas prices even more in 2015 and beyond.

     

    Commodity markets are cyclical and the current low prices for natural gas and coal are correcting now as investment in both resources are being slashed by the producers.
    1 Dec 2013, 06:57 PM Reply Like
  • bgkimmie
    , contributor
    Comment (1) | Send Message
     
    Thank you BermudaHigh for your clarification on this subject. I've been fretting about my investment in KOL (down close to 50% from my cost basis). It's obvious you are far better informed than the SA writers.Media that represents itself as fact is NOT what I, for one, want or need when seeking investment information/guidance.

     

    I've felt that many SA writers have a perspective that's "lacking" shall we say? This clinches it. Everyone loves to pick on a "whipping boy"...in this case it's coal!

     

    Also, thanks to G. Freiberg for additional valuable input.
    1 Dec 2013, 08:26 PM Reply Like
  • BermudaHigh
    , contributor
    Comments (571) | Send Message
     
    Absolutely, I felt compelled to respond. Unfortunately it is their headline that shows up in google searches and not our comments. The intent, of course is to make the shorting of the coal stocks and coal generation utilities a self-fulfilling prophecy. And I must say, the shorts have been doing a great job.
    1 Dec 2013, 09:03 PM Reply Like
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