The Energy World is Flat by Daniel Lacalle & Diego Parrilla

Author:Daniel Lacalle & Diego Parrilla
Language: eng
Format: epub
ISBN: 9781118867990
Publisher: Wiley
Published: 2015-02-20T00:00:00+00:00

Natural gas displaces coal in power generation

Combined cycle coal–gas plants can burn either coal or natural gas, somewhat similar to the flexi-fuel engine, but applied to the power generation sector.

As a result, the utilities will switch the demand in favour of the cheapest alternative, with the additional consideration of the cost of carbon permits, if any. As a rule of thumb, natural gas emits approximately one-third of carbon dioxide per unit of power when compared to coal.6 This makes natural gas a preferred alternative to coal.

In 2012, following the collapse in natural gas prices due to shale gas, large volumes of cheap natural gas became available. The price incentive was so large that utilities started to run their gas-fired production as baseload, instead of reserving for peak demand as was normally the case.

Demand displacement could be viewed as temporary, where a reversal in prices might bring coal demand back, as happened between ethanol and gasoline, but there is a case for permanent demand displacement too. New plants are favouring gas-fired units to replace older, less efficient facilities. In some cases, the closures are being forced by the regulator, showing that both the visible hand of the market and the invisible hand of the regulation are at work displacing coal in favour of gas.

In 2013, the consumption of US natural gas for power generation purposes increased by 34% from the year before, and given the demand of electricity remained largely unchanged, as a zero sum game, the increase in natural gas was pretty much entirely at the expense of demand displacement from coal.7

The imbalance in the supply and demand of coal resulted in a large increase in coal inventories and a reduction in prices, which forced high-cost producers to shut down operations.

But the collapse in US coal prices made it very competitive in Europe.

European gas prices were supported by Fukushima and high demand for LNG, which meant that European coal prices, combined with the low cost of carbon permits in Europe8 and reduced penalties for burning coal, kept profit margins at coal-fired power plants healthy while slashing profit margins for gas-fired plants. Anecdotally, the increase in coal burning pushed German carbon emissions up in 2012–13,9 the opposite of what was supposed to happen.

The displacement of European gas by coal was exactly the opposite of what was happening across the Atlantic, where natural gas was displacing coal. And the lower demand for natural gas in Europe meant lower competition for Japanese gas via LNG, which therefore kept global natural gas prices lower than they would have otherwise been. The “energy domino” in full force, advancing like water through canals, filling the demand with the lowest possible cost across the flexibility in the system.

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