Coal prices are competitive, but it isn’t leading to more coal-fired power in the PJM

Energize Weekly, December 19, 2018

A rise in natural gas prices has made coal more competitive, but in the PJM Interconnection, the nation’s largest grid, the usual utility switching to the cheapest fuel has been hamstrung by the closure of mines and coal-fired units.

“Conventional wisdom in PJM was that at times of high demand during the winter, coal generation would provide a backstop against more volatile natural gas prices,” a recent report by Morningstar, Inc. said. “However, a decade of retirements in coal generation and mine shut-ins in Central Appalachia have shrunk the safety net coal plants used to provide.”

Winter strip futures for natural gas are $4.25 a million British thermal units (BTUs), while CSX coal prices have increased this year, with the January-March 2019 strip increasing 28 percent to $74.45 a short ton since summer.

That increase in coal prices, Morningstar said, is more tied to the short-term increase in export markets than demand from the domestic utility industry.

Still even with the increase and a transportation cost of $17 a short ton, coal’s million BTU equivalent is $3.81—10 percent less than natural gas.

Nevertheless, between Nov. 26 and 28, PJM ramped up natural gas generation from 25 gigawatts (GW) to around 36 GW. Coal only increased from 26 GW to 30 GW over the same period.

“In part this is a consequence of the last decade of coal retirements that have decimated domestic markets, with the result being several producers exiting the space,” Morningstar said. “That has left little capacity for domestic mines to rally production to service an unexpected reversal in coal generation economics.”

Central Appalachian production has been hardest hit by the nation’s shift from coal to natural gas, Morningstar said. Coal-fired capacity nationally dropped 18 percent to 247 GW between 2008 and 2018. Natural gas capacity increased 12 percent to 514 GW over the same 10-year period.

In the PJM, which overlaps Appalachian coal and Marcellus natural gas regions, coal-fired capacity dropped 29 percent to 56 GW between 2008 and 2018, and natural gas capacity jumped 35 percent to 94 GW.

“No industry in the United States has seen as much disruption over the past decade as coal,” Morningstar said in a September report.

Appalachian production is up about 2.3 percent over last year at 182 million tons year-to-date, but that is spurred by the export market, which Morningstar said would be short lived.

This uncertainty has left coal producers and coal-fired generators reluctant to make commitments or investments, even though the 2018-2019 winter season begins with natural gas storage at historic lows and gas prices at a six-year high.

“That uncertainty challenges the need for generators to order additional coal as the [PJM] moves into the peak winter months unless unforeseen operational or weather events require them to act,” Morningstar said. “This reluctance to restock even when economics are good suggests coal will play a shrinking role in meeting system load.”

“Even where plants have capacity available to generate, the bottlenecks may come in their ability to purchase and receive coal when it is needed. Coal producers need more than high prices to invest in expanding production,” the report said.

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