{"id":1650,"date":"2015-03-03T18:15:53","date_gmt":"2015-03-04T00:15:53","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=1650"},"modified":"2015-03-03T18:15:53","modified_gmt":"2015-03-04T00:15:53","slug":"coal-to-gas-switching-2012-deja-vu","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2015\/03\/03\/coal-to-gas-switching-2012-deja-vu\/","title":{"rendered":"Coal to Gas Switching \u2013 2012 D\u00e9j\u00e0 vu?"},"content":{"rendered":"

This report available in PDF Form.<\/a><\/p>\n

The amount of gas and coal burns in the power markets go beyond simple economics when the price spread between gas and coal are very narrow as observed in 2012 \u2013 see figure below.\u00a0 Those attempting to use supply stacks or historical calculations will likely see incorrect numbers.\u00a0\u00a0 When the price spread is high, those methods will work quite well, as long as the markets do not observe large retirements or new builds in the power fleet.<\/p>\n

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To demonstrate the issue with low gas to coal price spread, we present our calibration results of fuel burns over the last few years.\u00a0\u00a0 Please note the 2012 discrepancy.\u00a0\u00a0 One could conclude our models are fatally flawed.<\/p>\n

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However, the goal of PMA is to understand the markets and quantify the risk in the market place.\u00a0 The calibration run represents the default runs that we run forward in time in our BASE case.\u00a0\u00a0 The key inputs, which drive the BASE case, are weather, economy, and commodity price.\u00a0\u00a0 Two large areas not demonstrated in the base inputs are outages and utility operations.\u00a0\u00a0 However, these are simulated in our risk runs that run daily with the BASE runs.\u00a0 The default outage profiles in the BASE case were developed based on a unit by unit investigation over a 5 year period.\u00a0 For the 2014 deviation, much of this can be attributed to outages which are captured in our risk cases.\u00a0\u00a0 The winter deviation was discussed in our winter assessment<\/a>.\u00a0 In addition, greater maintenance outage occurred in the shoulder months in 2014 as units have been installing FGD, SCR, and baghouses for the EPA regulations. The relevant issue for 2015 summer is how coal generators plan to operate and dispatch their plant.\u00a0 In the BASE case, utility operations are assumed to be market driven.\u00a0 However, in 2012, this is not what happened for several coal units.<\/p>\n

To prove this, we re-ran the BASE case with modifying the market behavior of several coal units.\u00a0\u00a0 Now the figure of coal consumption matches quite well in 2012.<\/p>\n

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The issue in 2012 which resulted in the need to change the operation mode of coal units was a result of the coal purchased in 2011.\u00a0 The futures market curve in 2011 for 2012 showed a much larger spread in gas and coal prices and also a robust power market price.\u00a0\u00a0 This resulted in a much larger purchase of coal than required in the market place in 2012.\u00a0\u00a0 This caused coal inventories to be very high- see figure below.\u00a0\u00a0 This dynamic of coal purchasing was a result in the shift in coal and power markets \u2013 see our discussion on Coal Market Changes below.<\/p>\n

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Many plants cited hazardous conditions of stock piles resulting in the need to use the coal regardless of power plant economics.\u00a0 If this behavior did not occur, the trajectory of coal inventories would have gone much higher.<\/p>\n

The reason not to adopt this method in the BASE case is the issue with power prices and the principle of market behavior being rationale over time.\u00a0 As expected, if the coal generators ran uneconomically, they would distort the price \u2013 see figure below.\u00a0 There is a Heisenberg Uncertainty Principle<\/a> in power modeling.\u00a0\u00a0 The volumes and price of the market cannot be discovered simultaneously in the same level of precision.\u00a0 As soon as you get your volumes correct your prices will be off.\u00a0\u00a0\u00a0 There is a give and take between those two.\u00a0 Given the model was developed for trading power prices and understanding the power market price risk \u2013 we prefer to be more accurate on prices than fuel burns.\u00a0 However we can adjust the settings for our clients need.<\/p>\n

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Most utilities still use the futures market as their guideline to purchasing.\u00a0 They should run multiple scenarios and situations using a platform like PMA to really understand the meaning of the futures market.\u00a0\u00a0 The futures market clearly weighs the risk of near term events more than the actual possibilities.\u00a0\u00a0 PMA can correctly quantify this risk, so you can make an educated decision on your fuel purchase.\u00a0 Not only can we quantify economy, weather, and commodity price risk, but we can quantify the other facets of the market place such as utility operations presented here.<\/p>\n

Our 2015 summer assessment (May-Sept) shows if we applied the same utility modifications done in 2012 we can see an increase of coal consumption of 14% from our base case.\u00a0\u00a0 The likelihood of this is less given the current coal stocks levels are lower plus the change in the market place as several coal units are de-regulated.\u00a0\u00a0 Before, many of the coal plants could get fuel recovery from their un-economic dispatch \u2013 see more explanation below in our discussion Coal Market Changes.\u00a0 This is less likely than in 2012, therefore there is less incentive to run uneconomically.<\/p>\n

Contact us to get a range of coal and gas consumption in the power sector plus power prices.\u00a0\u00a0 The current futures market is showing a very tight spread between gas and coal.\u00a0 This may reduce price volatility, but it will make up for it in coal and gas volume volatility.<\/p>\n

Also, consider creating your own set of conditions and parameters to run through PMA to get a much greater insight in the market space.\u00a0 PMA enables you to use your knowledge applied to our market knowledge.<\/p>\n

Please consider our services \u2013 help us help you succeed.<\/p>\n

Your Ever Evolving Energy Analyst,<\/p>\n

David<\/p>\n

David K. Bellman
\nFounder\/Principal
\nAll Energy Consulting LLC- “Adding insights to the energy markets for your success.\u201d
\n614-356-0484
\ndkb@allenergyconsulting.com
\n<\/a>@AECDKB<\/p>\n

Sign Up to AEC Free Energy Market Insights Newsletter<\/a><\/p>\n

Changing Coal Markets<\/h1>\n

An appreciation of what was occurring in the coal and power market pre 2012 is important to understand the current coal dynamics in the power markets.\u00a0 In the past, coal contracts were developed over long periods of time (some over decades).\u00a0 Overall commodities prices were rising worldwide, including coal.\u00a0\u00a0 Many coal producers no longer wanted to have long-term contracts in favor of shorter term allowing them to participate in this rising environment.\u00a0\u00a0 (Oh how they wish they didn\u2019t think that way now \u2013 greed gets the best of us.)\u00a0\u00a0 Coal generators felt the squeeze, particularly, if you had to purchase spot coal.\u00a0 The price of spot coal was very high and would be typically $10+\/ton more than contract coal.\u00a0 \u00a0During the height of the export markets, there were possibilities of not being to obtain coal at any price.\u00a0\u00a0 Therefore, there was much incentive to lock in most, if not all, of your expected coal purchase ahead of time, even if it was for just a year.<\/p>\n

Also contributing was the deregulation aspects of the power market.\u00a0 Before, a utility could plan and make a decision to produce power at fixed price given a fixed price contract for coal.\u00a0\u00a0 The regulated utility had a mechanism to fully recover all their fuel cost.\u00a0\u00a0 However, with deregulation and the developed option to obtain power from a market versus your planned generation, this caused a disconnect in the way things were done and how they can be done going forward.\u00a0 This new construct put several utilities in a position to not want to be bounded by too long of contracts either.<\/p>\n

Coal operators and coal generators need to come up with new ways to align themselves.\u00a0\u00a0 I believe coal contracts need to be structured on spark\/dark spreads allowing protection from low gas prices for the generators to ease inventory concerns and at the same time giving coal producers the upsides during peak time periods.\u00a0\u00a0 If you are interested in this process, All Energy Consulting will be happy to demonstrate and work with both the coal generator and coal producer to structure a win-win situation.<\/p>\n","protected":false},"excerpt":{"rendered":"

This report available in PDF Form. The amount of gas and coal burns in the power markets go beyond simple economics when the price spread between gas and coal are very narrow as observed in 2012 \u2013 see figure below.\u00a0 Those attempting to use supply stacks or historical calculations will likely see incorrect numbers.\u00a0\u00a0 When […]<\/p>\n","protected":false},"author":1,"featured_media":267,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,3,6],"tags":[228,365,142,366],"class_list":["post-1650","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-natural-gas","category-power","tag-coal-generation","tag-coal-to-gas","tag-coal-to-gas-switching","tag-gas-generation"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1650","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=1650"}],"version-history":[{"count":6,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1650\/revisions"}],"predecessor-version":[{"id":1662,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1650\/revisions\/1662"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/267"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=1650"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=1650"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=1650"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}