As coal-fired power generating plants are retired in a push for utilities to reach clean energy goals, a greater reliance on natural gas for power generation could support prices over the long term, according to market analysts.
Generally speaking, coal retirements are bullish for natural gas pricing, analysts said.
“As coal retires, the supply of coal being used and produced for generation purposes decreases, and the price of coal increases,” Gelber and Associates analyst Alex Gallegos told NGI. “This incentivizes fuel switching to natural gas, a far cheaper and cleaner source of energy.”
That could change, though, as utilities diversify their portfolios to include more renewable energy sources.
Some states have little to no coal-fired generating capacity or are advancing more quickly in the energy transition. In doing so, they are adopting energy policies that force utilities to slash their reliance on fossil fuel-fired generation in favor of renewable energy sources to meet net-zero emissions goals.
“Illinois, Minnesota and Michigan have goals to go to clean energy, and Virginia and Maryland are striving to be 100% clean by 2040,” Wood Mackenzie analyst Patrick Finn told NGI.
In those states, natural gas prices could come under modest pressure in the near term as power sector demand for fossil fuels falters. However, in states where coal-fired generation makes up a significant portion of utilities’ fuel mix, natural gas prices would remain supported.
East Prices Supported
There are still substantial amounts of coal capacity in the eastern half of the United States, according to Finn.
“From an independent system operator perspective, that would consist of Pennsylvania, New Jersey, Maryland (PJM); Midwest Independent System Operator (MISO); the Southwest Power Pool (SPP); and to a lesser extent, the Southeast,” he said.
By 2030, however, many of the existing coal-fired generating plants potentially would be shuttered, particularly in SPP and MISO.
“That 2030 time period is really where, at least right now, we stand to see forced retirements,” Finn said.
In PJM, retirements would be more gradual, with about 8 GW of coal capacity, mostly in Ohio and West Virginia, expected to stay online until 2040. Finn noted that First Energy and AEP, for example, have announced that they expect to keep some coal plants online until then.
“Once you get rid of coal, gas will pick up the slack as we are still rolling in this new renewable capacity,” Finn said.
The U.S. Energy Information Administration (EIA) said in its Annual Energy Outlook (AEO) 2023 released in March that “relative to 2022, natural gas generating capacity ranges from an increase of between 20% to 87% through 2050” as coal plants retire and as some new natural gas capacity is added.
New gas-fired power plant builds are still on the table in places like the western portions of PJM and most of SPP, which have weak or no renewable portfolio standards (RPS) goals, according to Finn.
However, it would be difficult to justify building additional gas-fired capacity in places like Illinois, Minnesota and Michigan with RPS on the table to get to 100% clean energy by the 2040-2050 time frame, he said.
Yet Gallegos said some of those same regions that still rely to some degree on coal-fired generation, particularly those with inadequate natural gas infrastructure, would have to reevaluate their energy needs.
“That could lead to a renewed vigor for natural gas infrastructure development in those regions, or lead to additional renewable development as costs for renewable energy continually drop,” the Gelber analyst said.
RBN Energy LLC analyst Jason Lindquist shared that sentiment. He noted that while Michigan, for example, is moving quickly away from coal, natural gas usage has climbed steadily over the past 20 years and the state expects that to continue, at least in the short to medium term. For example, while two units at the 544 MW Karn coal plant were retired in June, two other units are to continue operating through 2031 – powered by natural gas, with diesel as a backup fuel.
In the near term, the state’s Public Service Commission said earlier this month that it expected natural gas usage to jump another 7.6% in the winter of 2023-24, led by increased demand for power generation.
Northeast, West Pressured
The EIA said in its AEO 2023 that by 2050, solar generating capacity would grow between three and tenfold across the United States, and wind generating capacity between 138% and 235%.
The regions that are likely to invest the most into these renewables are the Pacific Northwest, California coast and New England areas, according to Gallegos. “They have a political interest in renewable energy, and so that infrastructure is far more likely to be built there rather than places that take more a stance against renewables such as areas of Texas and Louisiana.”
As wind and solar capacity are installed, the AEO 2023 forecasts natural gas use for power to slide from an average of 30 Bcf/d to about 20 Bcf/d by 2030, RBN’s Sheetal Nasta said in a recent blog. “That’s down by one-third in less than seven years.”
That would be a dramatic turn for natural gas balances in the medium to long term – and put downward pressure on natural gas prices.
Finn noted that natural gas still would be necessary to maintain reliability.
Reliability Mutes Retreat
“There is still a need for firm capacity, especially as more of the capacity we are building is intermittent,” Finn said.
Nasta agreed. “The problem is that even if there is significant new investment in wind and solar capacity additions, it can’t be counted on to consistently and reliably translate to more generation.”
As renewables take a bigger bite of the electric generation market share, “the risk of big upswings in gas demand increases when the wind doesn’t blow and the sun doesn’t shine, especially as electrification boosts total electric power demand and more coal plants are retired,” Nasta said. That should keep natural gas prices supported.
Even as renewables take on more new demand, natural gas will continue to serve the power sector, and more importantly for the broader market, LNG and Mexican exports, Gallegos said.
The Gelber and Associates analyst noted the pricing effects of increased natural gas generation are currently muted. Driving prices instead are macro fundamentals, such as liquefied natural gas export terminals coming online and robust production, which neared 105.8 Bcf/d on Tuesday, Gallegos said.
Wood Mackenzie’s outlook to 2050 shows gas prices continue to increase through the end of the review period and only gradually slip as a substantial amount of renewables are built.
“Natural gas will always be necessary,” Finn said.
