The US power market may be in for another wave of coal-to-gas switching this summer as potential replacement fuel demand from Western Europe drives global coal prices higher.
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The price pressure could come following a recent but potentially extended suspension of natural gas deliveries to Poland and Bulgaria, and potentially other Western European countries, by Russia's state-controlled Gazprom.
In recent years, the continued retirement of coal-fired generating capacity in the US has already forced many domestic power generators to become "price takers" in the US gas market.
Last summer, as domestic gas prices zoomed past $4/MMBtu, power burns continued at near-record levels. This winter, the same trend continued even as gas prices averaged closer $4.50/MMBtu, data from S&P Global Commodity Insights shows.
Over the past 16 months, the US power industry has retired nearly 6.4 GW of coal-fired generating capacity, making it harder for power producers to simply switch away from gas at high prices.
This coming summer, US power generators using coal could come under even more pressure following another possible surge in prices for the fuel stemming from increased demand in Western Europe.
On April 27, Gazprom said that it had fully suspended gas deliveries to Bulgaria and Poland due to non-payment in rubles. In late March, Russian President Vladimir Putin signed a decree requiring EU buyers to pay for Russian gas in rubles via a new currency conversion mechanism.
At the US-EU Energy Council High-Level Business Forum in Atlantic City, New Jersey, on April 27 European Union Commissioner for Energy Kadri Simson said that the EU was advising companies to keep their existing contracts and not unilaterally accept Russia's proposed two-stage payment procedure.
Assuming gas supply cuts to Bulgaria and Poland continue, with potentially others to be announced, Europe would likely turn to increased LNG and coal imports as potential replacement fuels for Russian gas.
On April 27, the Dutch TTF day ahead gas price gained nearly $1.60, or about 5%, to $32.01/MMBtu. CIF ARA coal meanwhile was down for a second consecutive day, shedding nearly 7% to $303.40/mt, S&P Global data showed.
For the US gas market, higher gas prices in Europe this summer would likely have little impact given that US LNG exports are already operating at full tilt this year, averaging about 12.5 Bcf/d year to date.
Assuming coal replaces at least some of Europe's lost gas supply from Russia, though, upward pressure on CIF ARA, and ultimately Appalachian Basin coal prices, could have more direct implications for the US gas market. Since late March, CAPP coal has traded at 14-year highs over $140/st. Higher prices could mean that even $6-$7/MMBtu gas becomes the cheapest option for most US power generators.
"If Europe is short gas supply there's very few other options for them to lean on, which could lead to increased use of coal and therefore increased US coal exports," said Tyler Jubert, power analyst for S&P Global Commodity Insights. "US coal inventories are already low though, so it could put further strain on available supply driving coal prices and power prices that much higher."