Buried in a wave of reports published over the past several weeks is a startling fact that does not augur well for the struggling coal sector.
In fact, this is the most dramatic indication yet that coal is dying – even faster than expected.
Because of a relative newcomer to the U.S. electricity-production game (you already know “who” it is), prices for old stalwarts like coal and even nuclear power are being pushed down.
And if things don’t improve in the next 12-18 months, several additional coal and even nuclear power plants may face closure – and their shareholders will get burned.
Coal is Being Retired Faster than Expected
While coal has been under pressure for some time, the latest indications are that the low price of natural gas is beginning to result in the likely retirement of additional coal-fired electricity generation.
Absent a major spike in gas prices, natural gas may actually surpass coal in electricity-generating capacity before the end of this year.
The impact of this may even extend into the nuclear segment of power production.
As reported by SNL Financial, “Moody’s warns that ‘persistently low natural gas prices’ have placed several coal and nuclear power plants at risk of closure, with merchant generators scrambling to cut costs.”
The cost of natural gas is now the barometer for marginal electricity rates and those rates dictate the price of unregulated electricity in the U.S. power sector.
As Moody’s put it: “Low natural gas prices have devastated most of the US merchant power sector because gas-fired power plants often serve as the marginal plant during times of peak power demand. Lower natural gas prices have effectively driven down wholesale power prices for all generators, regardless of whether they are using natural gas, coal, nuclear power or renewable resources to generate their electricity.”
The forecast developing for coal is even bleaker because of a long-running trend…
Forward-pricing is Hurting Coal Power Plants
As in any segment of energy production, forward pricing curves have an impact on what is realized for energy sales at any given time.
This is simply the presumption that what futures contracts are pegging pries at today will comprise the basis of actual prices tomorrow.
In an interview last month, Moody’s Vice President and Senior Credit Officer Toby Shea laid it out this way: “In the past, over six years, every time the forward becomes the spot, the prices have fallen, except for 2014. So, it’s not clear that the forward prices that we see right now [are] going to still be where [they are] by the time we get there.” If past performance is any indicator, weakness in the “forward” will translate into lower – or at best stagnant – spot prices.
Spot prices are those set in ad hoc, short-term, and more or less immediate, sales of energy (unlike longer-term contracted sales). However, this becomes a more decisive standard when electricity is considered.
That’s because the price is tempered by the limited ability to store power.
Futures contracts are certainly bought and sold, as they are for crude oil, natural gas, and even coal. But electricity is far more sensitive to the cost-price dynamic when it comes to when the power is generated, given the need to transmit as generated. It is at this point that the peak and off-peak pricing differential is important in determining the spot price.
And then there is the bridging between the contracts for energy source and that for the electricity itself. This produces another spread: called a “spark spread” for natural gas and a “dark spread” for coal. Both the producers of the energy source and the generators of power must rely upon such spreads in hedging against variations in marker price for the gas, coal, or electricity.
This is becoming a very harmful trend for all generators. However, the Moody’s report concluded that it is “most harmful to coal-based generators and to a lesser extent nuclear-based generators.”
These are the Companies That’ll Get Burned
The report explained it this way: “In the current commodity price environment, most unregulated coal and nuclear plants are generating little or negative cash flows. We believe that if the current gas price environment of $2/MMBtu [or 1,000 cubic feet] does not improve in the next 12-18 months, there could be more large-scale coal and nuclear plant closures, especially in regions without a forward capacity market, such as Texas and the Midwest.”
For his part, Shea identified the “area with the highest risk” as being the Electric Reliability Council of Texas Inc., especially for coal plants. Coal plants in the Illinois part of the Midcontinent Independent System Operator Inc. are at risk as well, he said, adding, “Also, all the single-unit nuclear power plants, no matter where they are … if you’re a single unit, you’re at risk,” based on the risk to economies of scale. “If you have two or three units, it’s a lot bigger, so your cost goes down [on a] per unit basis,” he noted.
Moody’s has identified some of the larger individual coal-fueled plants probably being targeted for conversion from coal to gas. Leading the list here is the NRG Energy Inc. (NRG) Limestone plant in Texas and the Dynegy Inc. (DYN) Illinois Power Generating Company unit at Newton in Illinois.
In addition, some coal plants in Pennsylvania and Maryland are also at risk of either shutting down or being converted to natural gas. Moody’s pointed toward the main candidates for conversion there being the NRG affiliate GenOn Energy Chalk Point 1 and 2 units and the Dickerson coal plant in Maryland. The Talen Energy Crop. (TLN) Montour coal plant in Pennsylvania may also be converted to gas or a combination of coal and gas, according to the report.
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