Calpine sees ongoing benefit of low-cost natgas, despite rise

HOUSTON, July 27 (Reuters) - Calpine Corp, which operates the nation's largest fleet of efficient natural gas-fired power plants, said the recent increase in gas prices from 10-year lows and the return of coal-fired plants to meet summer demand will temper the increased demand it has seen for its power output.

Higher summer demand to meet air conditioning load means more U.S. coal plants will run, but longer-term Calpine sees a "significant" increase in the amount of coal generation that will shut.

Houston-based Calpine produced 27 million megawatt-hours in the second quarter, up 37 percent over the year-earlier quarter, with higher output in the four major U.S. power regions where it operates.

The second-quarter increase was led by a doubling of power production in California where utilities are struggling to replace lost output from two nuclear reactors which are shut for an extended period.

In other markets, Calpine benefited from coal-to-gas switching as utilities were able to buy power from gas plants more cheaply than they can produce it from coal-fired plants as an oversupply of gas depressed spot prices to the below $2.50 per million British thermal units.

Calpine's 91 power plants produced 56 million MWh in the first six months of the year, up 44 percent from the first half of 2011.

And that's ahead of the summer months, typically Calpine's strongest quarter as power demand soars to meet air conditioning demand.

Running its plants 24 hours a day helped reduce operating costs per MWh, said Thad Hill, Calpine's chief operating officer.

"The analogy we use is putting highway miles versus city miles on a car," Hill said on a call with analysts.

As natural gas prices have crawled toward $3 per MmBtu in Texas and $4 in eastern U.S. markets, the attraction of gas over coal begins to diminish, Hill said.

Calpine expects utilities to run coal plants during the hot summer months to meet higher baseload demand, meaning gas-fired plants will be used to meet afternoon peak power needs.

"Everything is online and you're switching on and off, based on the economics, versus having some coal plants that were laid up," Hill said.

In the next few years, Calpine Chief Executive Officer Jack Fusco said more affordable gas and the finalization of more stringent environmental rules will only "significantly" increase the amount of coal-fired generation to shut.

"Approximately 40 gigawatts of coal plants have already announced retirements, much of which are smaller, older, less efficient units," Fusco said.

While many shutdowns are attributed to pending environmental regulation, the economics of sustainable lower gas prices play a large role, Fusco said.

"In the current natural gas price environment, coal plants are financially challenged, even before considering the installation of expensive environmental retrofits like scrubbers, SCRs and baghouses," he said.