March 2, 2017 / 9:31 PM / 2 years ago

Early surge in coal usage in 2017 may not last

(Reuters) - There are signs utilities are buying more coal this year than last thanks to a late-year surge in natural gas prices, but the black rock still isn’t expected to regain its crown from gas as the leading fuel source for power generation.

Haul trucks move coal as seen during a tour of Peabody Energy's North Antelope Rochelle coal mine near Gillette, Wyoming, U.S. June 1, 2016. REUTERS/Kristina Barker -

That’s even as President Donald Trump has said repeatedly that he wants a revival of coal production, a dirtier fuel than gas that has seen its fortunes decline thanks to a shale boom that has boosted gas production.

Gas prices rose in late December, and analysts have been predicting an improved outlook for 2017 for coal, as higher gas prices make coal the cheaper fuel for some power generators, according to analysts and government studies.

The Association of American Railroads (AAR) said on Wednesday that the number of rail cars loaded with coal in February increased over 19 percent compared with the same month in 2016, the biggest percentage gain on record, according to AAR data to 1988.

“While it’s an impressive gain, February 2017 was, unfortunately, also the second worst February in absolute terms for coal since sometime before 1988,” John Gray, AAR Senior Vice President of Policy and Economics, said in a release.

Gas prices were expected to rise about 25 percent in 2017, which would favor more coal production. [NGAS/POLL]

Since late December, though, gas futures have dropped 30 percent, which could threaten coal’s projected comeback, after last year giving up the mantle as the primary source for U.S. power production.

U.S. coal production totaled 739 million short tons in 2016, lowest since 1978, according to the U.S. Energy Information Administration (EIA). EIA projected coal output would rise to 762.5 million short tons in 2017.

The power sector accounted for 92 percent of the coal consumed in the United States in 2016. Coal competes with gas as the fuel most used by the power sector to generate electricity.

However, with growing gas export demand, switching from coal to gas this year will be somewhat reduced, analysts said. In the past couple of years coal has been the more expensive fuel when the cost of transport and the lower efficiency of coal plants is included, at least in the eastern part of the country where most of the coal-to-gas switching has occurred.

“We need that gas to go into storage to help meet growing demand, including LNG (liquefied natural gas) exports... especially with gas production being down from last year,” said Keith Barnett, senior vice president at gas marketer ARM Energy in Houston.

Gas prices at the U.S. Henry Hub benchmark in Louisiana fell to $2.49 per million British thermal units in 2016, the lowest since 1999.

Low prices provided the incentive needed for the power sector to use more gas than coal to generate electricity for the first time ever. In 2016, energy firms produced about 34 percent of the nation’s power with gas and just 30.4 percent with coal.

“We think power generation this summer could end up with only a small loss, or even a slight gain over last year’s gas power demand,” said Martin King, director of institutional research at GMP FirstEnergy in Calgary.

Reporting by Scott DiSavino; Editing by Chizu Nomiyama

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