Yahoo Finance An Increase in Natural Gas Prices Brings Hope to Coal Producers
Higher Electricity Generation Fails to Cheer Coal Producers
Natural gas prices
After falling the previous week, natural gas prices rose again during the week ending July 3 on bullish inventory data, as discussed in Part 1. Hot summer weather spread throughout the country, prompting Americans to use more electricity for air conditioning.
The increase in demand for electricity is bullish for natural gas and coal, as they contribute around 70% to total electricity generation in the US. The Henry Hub spot price increased to $2.79 per million British thermal units (or MMBtu) on July 2, compared with $2.77 per MMBtu on June 26.
Why are these indicators important?
The shale gas boom led to a massive rise in production of natural gas, which in turn spurred a drop in prices. As a result, natural gas became a competing fuel for coal. The cleaner, more competitive natural gas ate away the market share from coal in electricity generation—and continues to do so.
Natural gas prices and coal’s market share in electricity generation are related. When natural gas prices rise, coal gains market share. It becomes more economical to burn coal for power generation. A fall in natural gas prices generally leads to a fall in coal’s market share because natural gas is available at cheaper rates.
Impact on coal and utilities
A rise in natural gas prices is positive for coal producers (KOL) like Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP). With an increase in price, natural gas becomes relatively more expensive as a fuel for electricity generation than coal.
For utilities (XLU) like PG&E (PCG) and Southern California Edison (EIX), the impact depends on the level of regulation. If their contracts are strictly on a cost-plus basis—they get a fixed return over and above costs—the impact isn’t significant. For utilities with fixed-price contracts—they get a fixed price regardless of changes in input costs—the drop in natural gas prices is positive.
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