Despite the fact that the number of rigs exploring for natural gas in the US has dropped by over 40% in the past six months, the supply of natural gas in the market remains stubbornly high. In fact, weak industrial demand, milder temperatures, and expectations of additional liquid natural gas supply coming to market this summer have pushed prices low enough that utilities are now beginning to switch from using coal to natural gas in order to save money.

In the last two months both Southern Coal  and American Electric Power have come out with statements that they would be burning less coal in favor of natural gas because natural gas generation costs are lower. Indeed, the economics of fuel switching are so attractive that Industry analysts are now expecting that utilities will take advantage of the oversupply conditions in the natural gas market to reduce their coal consumption by millions of tons this year.    

While this appears to be a rather large amount of fuel switching, a recent investment bank report suggests that during the 2001/2002 winter, power generation from natural gas increased substantially due to low natural gas prices relative to coal. This motivated power generators to increase their demand for natural gas by more than 1.4 Bdf/d that year while coal demand fell by nearly 28 million tons. In percentage terms, this was a roughly 3.3% decline year-on-year in coal demand while natural gas rose more than 6% year-on-year (see graph below):

Furthermore, the industry report expects more coal-to-natural gas fuel switching to take place now than in 2002 due to improvements in the efficiency of combined cycle gas turbines (CCGT) at natural gas plants. This increase in efficiency will allow utilities that burn gas to operate at cheaper rates than they did previously and thereby discourage the continued use of coal.  

Another important fact to highlight is while natural gas prices have plummeted this year, coal prices have remained relatively stable. This failure of coal prices to fall in line with natural gas prices helps further support the argument that there is not enough "cheap" coal available today to meet the needs of a liquid coal industry in the United States. Our electricity bills would only rise further if liquid coal was allowed to compete with power generation for our coal supplies and efforts to encourage the construction of liquid coal facilities should be dismissed out of hand as being unworkable.

In sum, fuel switching away from coal to natural gas is already taking place in the market as natural gas is now a cheaper fuel source than coal. Indeed, coal is now an expensive fuel and is only expected to get even more expensive as climate legislation begins to regulate carbon dioxide emissions.