US gas-fired generation gains as Russia-Ukraine war hikes coal prices globally

A surge in global coal demand following Russia's invasion of Ukraine has propelled Central Appalachian prices for the fuel to record highs recently, prompting some power generators in the eastern and central US to begin switching back to natural gas.

Since late February, thermal coal prices have skyrocketed globally as traders and end-users seek potential replacements for Russian fossil fuels. In March, CIF ARA coal – Europe's benchmark price – has hit record highs near $400/mt, data from S&P Global Commodity Insights shows.

In Appalachia, prices have followed the global market higher, rising last week to nearly $140/st – also the highest on record dating back to at least 2005 when CAPP coal data collection began.

While gas prices remain elevated in markets like PJM and the Midcontinent Independent System Operator, more than a few generators are getting the right price signals to ditch coal for now.

At Tennessee Zone 4 in central Ohio, spot gas prices have averaged just over $4/MMBtu in March. Farther west at the Chicago city-gates, prices are averaging closer to $4.50 this month. At both locations, prices are down from winter highs around $5 to $6, S&P Global Commodity Insights data shows.

Coal vs. Gas

The recent retreat in thermal coal generation has been most pronounced in PJM where the fuel accounts for about 19% of total power generation in March – down from an average 24% in February and 27% in January. Over the same period, natural gas has gained ground, rising to an average 39% of total power generation in PJM this month, compared with 35% in February and about 33% in January, data from the regional transmission organization shows.

In MISO, the shift in generation share is more recent and also more nuanced, but directionally the same. Since February, coal has lost about one- to two-percentage points in generation share with gas gaining roughly as much, ISO data shows.

While both US coal and natural gas are now in high demand globally, exports of the former could be potentially more responsive to global markets over the short term – a factor that may keep Appalachian prices higher for longer. For natural gas, any US response to global prices will likely be more delayed given that US export capability is currently operating at, or very close to, full capacity.

Exports

US exports of thermal coal are expected to rise this year as disruption of Russian coal supply into Northwest Europe continues – that's according to a recent forecast published by analysts at S&P Global Commodity Insights.

Reportedly, some customers in Europe are receiving just 25% of their contracted Russian supply, according to the report. As a result, the S&P Global forecast now calls for US thermal coal exports to total about 38 million mt in 2022 – an increase of 2 million mt from 2021 and an upward adjustment to the previous forecast, which had expected a modest decline in US thermal coal exports this year.

With stronger export demand for US coal this year, dual-fuel power generators with exposure to the CAPP coal market may be better off by making the switch to gas-fired power.

Although demand for US LNG is also expected to remain strong this year, exports should only grow incrementally as new capacity at Venture Global's 10 million mt/year (1.3 Bcf/d) Calcasieu Pass terminal continues to ramp up. Demand from other approved and/or FID-sanctioned terminals likely wouldn't come online until 2023 or possibly later.

In March, flows to Calcasieu Pass have averaged about 550 MMcf/d. Including demand at the US' other six operational export terminals – which are running close to capacity – total US exports have averaged about 12.7 Bcf/d this month, S&P Global Commodity Insights data shows.