Rising coal price will not cause natural gas price to rise, according to Wood Mackenzie

24 August 2004 – Breaking with conventional thinking on the effects of coal price on gas price, new research by Wood Mackenzie finds that rising spot Central Appalachian coal (CAPP) prices will not lead to a meaningful increase in demand or price for the already tight natural gas market.

The report “Coal Displacement Fears Overblown,” part of Wood Mackenzie’s North American Power Insight service, concludes that the number coal-fired generation units at risk is too small to impact the market for natural gas. Believing that the recent run-up in CAPP coal prices will cause an increased dependence on gas-powered plants instead of coal-powered plants, many industry analysts have predicted that a shift from coal to gas units will drive up the cost of gas.

Analysts at Wood Mackenzie, however, find that a convergence of three events needs to occur in order for gas price to be affected:

* The inefficient coal units must be located in specific regions.
* They must be purchasing spot CAPP coal.
* They must be buying SO2 and NOx emission credits.

Otherwise, the current trend in rising spot CAPP coal prices will not reach the tipping point for gas-fired units to be competitive. In fact, the cost of coal would have to increase by more than 50 percent to even cross the gas price threshold, and even then the effect would be negligible.

“What we’ve found is that, in essence, the market has been overreacting to coal prices,” says Joseph Sannicandro, vice president of North American power research at Wood Mackenzie. “We believe that, despite what some reports say, companies do not need to go out and contract for extra gas supplies. Our independent research analysis tells us that recent coal price increases will not have any substantial impact on the already tight market for natural gas.”