The Implications of Lower Natural Gas Prices for Electric Generators in the Southeast

Highlights
This supplement to the Energy Information Administration’s (EIA) May 2009 Short-Term Energy Outlook (STEO) focuses on changes in the utilization of coal- and natural-gas-fired generation capacity in the electric utility sector as the differential between delivered fuel prices narrows.

Over the last year the price of natural gas delivered to electric generators has fallen dramatically. Current natural gas prices now present increased potential for displacing coal-fired electricity generation with natural-gas-fired generation.

Because combined cycle natural-gas-fired electricity generators are generally more efficient than typical coal-fired units, consuming fewer Btu of fuel per kilowatthour of electricity generated, natural gas prices do not need to fall as low as coal prices before substitution of natural gas becomes attractive.

The delivered cost of coal is generally highest in the southeast region of the United States because of transportation costs from the coal-producing regions such as the Powder River Basin in Montana and Wyoming. Consequently, the greatest potential for natural gas substitution for coal is expected in the East South Central (ESC) and South Atlantic (SA) Census divisions.

Based on December 2008 average delivered coal prices of $2.58 per million Btu (MMBtu) in the ESC and $3.06 per MMBtu in the SA, a decline in the average delivered natural gas price from $4.75 to $4.25 per MMBtu in each region could boost natural gas consumption for baseload electricity generation in the electric power sector by about 2.1 billion cubic feet per day (Bcf/d) in the ESC and SA combined.

The extent of potential increased natural gas consumption in the electric power sector because of lower natural gas prices relative to coal still remains highly uncertain. The ability of the electric power sector to switch fuels for baseload power generation may also be significantly affected by several other factors such as contractual obligations, particularly for delivered coal, constraints in the capacity of natural gas pipelines or the electric grid transmission system, the availability of gas-fired combined cycle generation capacity and the ability of some regulated electric utilities to pass on costs to consumers.

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