"The higher the gas prices try to move, the less attractive coal-to-gas switching becomes," said Stephen Schork, a noted energy analyst, in the Wall Street Journal on Saturday, May 26th. Natural gas prices fell nearly 8 cents or 3% on Friday, settling at $2.56 for June delivery. Prices were down 6.4% for the week.
Aside from weather, demand from electric power plants is the key factor currently impacting natural gas prices. But the total demand from electricity generation for natural gas is determined by the comparative pricing of coal and natural gas. Indeed, significant amounts of electric generation demand in the USA can be met by either gas or coal plants, creating intense, almost daily price competition between the fuels, as many hours in the year total electric demand can be met by a fraction of the total available electric supply.
At dual-fuel plants, fuel-price alone determines whether coal or gas is the winner.
Observable since 1990, the trend toward more natural gas and less coal usage, however, became a stampede, when huge shale gas production pushed in 2011-2012 natural gas prices below $3, and then $2, for a thousand cubic feet.
At those prices making electricity was cheaper with gas than coal. The result was that the electricity generation market share of coal collapsed again, dropping a full 6 percentage points, from 42% in most of 2011 to 36% in the first quarter of 2012.
In significant part, because so many plants began to use natural gas in the 4th quarter of 2011 and the first quarter of 2102, natural gas prices bottomed this April, bouncing off the $1.80 level, rising more than 70 cents per thousand cubic feet in the last 4 weeks or so.
Yet, last week prices ran into a "coal price cap."
As coal demand decreased substantially in the last 6 to 12 months, coal prices fell, making coal more competitive. Last week, the natural gas market signaled that gas would lose significant demand to coal, if gas prices hit $2.75 per thousand cubic feet. The $2.75 price point is approximately where natural gas starts to lose market share to coal, given current supply and demand market conditions for electricity, natural gas, and coal.
How much of the electricity generation market can switch back and forth between coal and gas? A lot.
The last 6 months indicate that about 6 percentage points of the national electricity market can move back and forth quickly between coal and gas, depending on the price of each. Those 6 percentage points are more than the total electricity provided by all wind and solar generation in the USA. Again, it is a lot of power, switching between gas and coal.
Banning hydraulic fracturing, as Vermont has done (though it continues to import and use gas), would move massive amounts of electricty demand--much more than the 6 percentage points of total market share that is almost daily contestable--from gas to coal and quickly. In the real world of energy markets, the choice is often between coal or gas. Refusing to face that fact does not make it any less real.