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Switch From Coal To Natural Gas Comes With High Cost

By T.L. HEADLEY, MBA, MA, BA

Yesterday marked the end of the public comment period for the EPA's proposed Existing Source Performance Standards, now called the Clean Power Plan. Politicians, industry leaders and even state regulatory agencies lined up to criticize the plan, calling it "irrational, unattainable and illegal."

This criticism may seem overblown but it is, in fact, warranted, and the American consumer should be very concerned about the future of the nation's electric grid and about future electric costs.
In light of the many warning bells that have gone off over this and other recent EPA policies, it would seem wise to take a step back and determine whether the current course is wise.

To make a sound decision, you have to look not only at the current price but also at price volatility and at the minimum sustainable market prices of the various fuel types. When you incorporate all those factors into the assessment, you find that the picture shifts back to strongly favor coal.

If you look at some current national and even local media reports, you would come to believe that coal is in a long-term decline. Those reports, however, are superficial and amateurish and ignore the reality of the core economics of coal, gas and oil in the marketplace and the long-term sustainable relationship of those fuels in electric generation.

First, natural gas is not currently cheaper than coal in the marketplace. The current price of natural gas on the Henry Hub is about $3.90 per million Btu compared to the price of coal, which is about $2.45 per million Btu. As recently as 2011 the price of natural gas has been as low as $1.98 per million Btu.

Second, looking back at the current price structure and comparing it to the sustainable market prices we find that even at the current price of $3.90 per million Btu (fully $2.80 above recent lows), natural gas is still significantly below MSP, which is by the industry's own estimates around $4.50 per million Btu. Coal, meanwhile, even at the current depressed market prices, is trading above its MSP of approximately $2.00 per million Btu (a price level of approximately $50 per ton for Central and Northern Appalachian coal).

Now, adding the historic price volatility to the assessment we find that natural gas has seen wide price swings over the past 20 years - from highs of nearly $15 per million Btu to the recent lows of $1.09 per million Btu. Even this past winter, natural gas prices soared during the "Polar Vortex." By comparison, coal has traded in a much narrower, much more predictable range of between $1.90 and $3.20 per million Btu. The average market price for the past 20 years for the two fuels is approximately $8 per million Btu for gas while coal's average price is approximately $2.60 per million Btu.

When you consider that fuel cost alone accounts for approximately 70 percent of a natural gas electric plants annual operating costs but only about 20 percent of a coal-fired plant's annual costs, a good CEO would quickly come to the realization that making such a switch is economically unsound.

We should also understand that we are making these decisions at a time when energy demand worldwide is down due to the constraints of the world economy. Reducing our energy capacity now will result in energy shortages and skyrocketing prices for consumers, essentially locking the economy into this economic stagnation for the foreseeable future.

Now, the data analysis is admittedly a bit of a sleeper … but the bottom line is this --- switching to natural gas at the current price structure as the primary electric generation fuel is essentially locking in a huge inflation factor for the end user (the consumer) in the short and long term.

In fact, according to a new study by Arlington, Va.-based Energy Venture Analysis Inc., the push for more restrictions on coal-fired power plants and the resulting shift to using more natural gas could cost American homeowners $750 to $850 more per year for energy use in 2020 compared to what they paid in 2012.

The study, "Energy Market Impacts of Recent Federal Regulations on the Electric Power Sector," factors in the EPA's proposed carbon rule and other regulations, along with the expected doubling in price of wholesale natural gas in coming years.

Nationally, consumers and businesses would see the cost of electricity and natural gas increase by nearly $300 billion in 2020 compared with 2012, the study found. Each household would shoulder about $680 of that share, the study found, an increase of 35 percent, which in turn would drive up the cost of all products produced using electricity.

The study identified a $177 billion increase in electricity costs and a $107 billion increase in natural gas costs in 2020 compared with 2012 when the cumulative effects of EPA regulations and energy market impacts are analyzed.

The industrial sector will be especially hard hit with total electricity and natural gas cost for the sector approaching $200 billion in 2020, almost double the cost from 2012. This could hamper industrial growth in the U.S., as companies that produce aluminum, steel and chemicals rely on low-cost and reliable electricity to compete in the global market.

So, if it is uneconomical, why is this switch to natural gas happening?

It is happening because of the policy decisions coming from the Obama EPA - which is leading to both fuel availability uncertainty (they are not issuing coal permits) AND forcing the retirement of existing coal-fired capacity (28,000 MW) that is unable to meet the new, draconian standards imposed by the Obama Administration in its single-minded pursuit of all things green.

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