How Shale/Sub $3 Gas Created An Avalanche Of Switching From Coal To Gas

Though it is well understood that coal has lost a lot of electricity generation market share to natural gas, few are aware how natural gas prices below $3 have caused an avalanche of switching just in the last 12 months. Over a 12-year period from 2000 to the first quarter of 2012, coal's market share loss stands at 16 percentage points. But remarkably one half of coal's market share loss happened in the last 15 months.

Let's review a bit of energy history.

From 2000 to 2008, coal's electric generation market share declined from 52% to 48%, declining at about 0.5% per year.  While coal's share declined prior to the shale gas boom in 2008, the decline was slow and the size of the electricity generation market was growing, meaning that coal consumption and production was largely unaffected by the shift to natural gas in that period.  Coal was slimming but essentially holding its own.

All that changed in 2008, when shale gas production rocketed up, causing the price of natural gas first to fall to $6 per thousand cubic feet, then to $4, and now below $3 and sometimes even $2.  Once gas fell below $3, gas often became a cheaper electric generation fuel than coal and the conditions for an avalanche in the market had been created.

Before gas reached prices below $3,  gas fell to the $4 range in 2010, causing the rate of coal's market share loss to increase to 2% per year.  From 2008 to 2010, coal's market share declined from 48% to 44%.

And when gas went to $3 and below, the switch to gas became an avalanche.

From the end of 2010 to the first quarter of 2012, coal's electric generation market share fell from 44% to 36%.  This dramatic change shows how the shale gas boom intensified the coal versus gas price competition.

In that competition, coal's loss of market share is made more painful, because the electricity pie stopped growing for much of the time since 2008, as a result of the economic downturn, increasing efficiency, and one of the warmest 2011-12 winters on record.  EIA projects that the result will be substantial declines during 2012 of coal consumption and production, followed by a small rebound for coal in 2013, if natural gas prices rise above $3.