How quickly things change
- Charles Dickens
Forgive coal companies and coal investors for embracing the opening passage from A Tale of Two Cities. After a record year for coal in 2022, driven by high natural gas prices and a tight market following the Russian invasion of Ukraine, coal market dynamics have done a u-turn.
Warm winter weather in Europe and the U.S. has resulted in bloated gas storage inventories for this time of year. Natural gas prices have plummeted approximately 70% and coal has followed suit in 2023, with the NEWC 6,000 index off more than 50% from mid-December.
In short, low natural gas prices and accelerated renewable development in developed countries has coal power generation on the ropes. We take a look at recent data for insights into coal-to-gas switching and recent market gyrations.
Lumps of Coal
U.S. coal generation has been off 30% in recent days versus a year ago, with some RTOs near all-time low percentage drops.
U.S. coal generation thus far in 2023 is off by approximately 30 TWHrs versus 2022 and 2021, with relative reductions varied across the seven RTOs in the U.S.
Note that ISONE, NYISO and CISO all have effectively zero coal generation.
Although the trendline is visibly lower in this dataset, the decline is moderate. It remains to be seen if market dynamics this year will accelerate coals' demise.
MISO, PJM and generation in non-RTO areas dominate coal generation in the U.S.
Enersection plotted coal as a percent of thermal generation vs natural gas prices to track coal-to-gas switching. We plan to make these charts auto-updating and always available soon. We find it interesting that 2019 coal-gas correlation had a significantly positive slope - higher gas prices leads to more coal generation - whereas recent years have a negative slope and clearly changing relationship.
Please note that the buttons on the chart can be used to view the other RTOs. Of note, from those visualizations:
ERCOT recent saw its lowest reading of coal as a percentage of daily thermal generation ever and SPP still shows a positive sloping relationship, while also having the highest amount of coal generation as a percent of thermal.
Plotting coal share of thermal stack over time highlights coal generation remains a sticky part of U.S. power generation. We intend to do more work on the topic in the future to prove this theory out, but Enersection believes coal generation has a floor near 30% capacity factor for plants still operating. Anything materially lower than that level would result in fixed costs leading to uneconomic results.
This chart will be interesting to watch this year. If gas and renewables are going to finally knock coal out, 2023 is presenting an opportunity.