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Today in Energy

December 6, 2012

Cheaper natural gas alters generation dispatch in Southeast

Graph of U.S. oil imports, as explained in the article text
Source: U.S. Energy Information Administration, Power Plant Operations Report (Form EIA-923).
Note: Summer months include June, July, and August. The Southeast United States consists of the East South Central and South Atlantic U.S. Census Divisions

The electric power industry in the southeastern United States has undergone substantial changes over the past three years. While coal-fired power plants continue to generate more than half of electricity in the region, coal-fired generation has declined since 2010, and production from natural gas-fired plants has increased. This change can be primarily attributed to changes in the relative prices of natural gas and coal, which altered the dispatch order of power plants in the region.

Fuel prices can have a significant impact on the electricity generation mix. Historically, coal-fired generating units supplied a large share of the demand for electricity in the southeastern United States, partly because of their low fuel-related operating costs compared to natural gas. This was evident in the summer (June, July, August) of 2010, when coal accounted for 50% of the region's electricity generation, while natural gas accounted for only 26%. In contrast, during summer 2012, natural gas accounted for 34% of the region's overall generation, and the coal share dropped to 42%. Summer 2012 saw a 40% decrease in the Henry Hub natural gas spot price (the national benchmark price) from 2010 levels, and the electric power system responded with a corresponding 18% increase in the use of natural gas for generating electricity in the region over the same time period.

Graph of U.S. oil imports, as explained in the article text
Source: U.S. Energy Information Administration, Form EIA-923, SNL Energy, and Coal Transportation Rates to the Electric Power Sector EIA Report.
Note: The assumed cost of generating electricity is calculated by using the Henry Hub natural gas spot prices, CAPP Big Sandy River coal prices, and Powder River Basin Rail coal prices for June, July, and August in 2010, 2011, and 2012. The fuel price (in $/mmBTU) was multiplied by the observed heat rates for each type of plant in the region to get a $/MWh fuel-related cost value. Coal transportation costs were estimated by adding the assumed rail rates for CAPP coal to North Carolina and PRB coal to Georgia to the respective coal type.

Generally, operators dispatch power plants based on their variable costs of generation, of which a key input is fuel costs. In the southeastern United States, EIA estimates that the approximate fuel-related variable cost of natural gas plants in the summer months fell 43% between 2010 and 2012, driven principally by the drop in natural gas prices during the period. The cost of generating electricity from natural gas in the Southeast during the summer of 2010 was close to the cost of dispatching coal units relying on Central Appalachian (CAPP) coal. However, by 2012, the relative cost of generating electricity in the Southeast from natural gas was on average lower than the cost of generating electricity from CAPP coal, and at times natural gas generation was competitive with dispatching electric power plants using lower-cost Powder River Basin coal.

The changing makeup of supply curves highlights the increased competition between coal- and gas-fired generators, particularly in the Southeast. Electric power system operators use supply curves (where the available capacity is plotted against variable operating costs) to determine the order in which plants are dispatched to meet the demand for electricity. However, in this article, the supply curves are used to show what units were actually dispatched instead, by plotting the average variable operating costs against the cumulative generation that occurred. The variable operating costs include fuel-related costs, nonfuel related operating and maintenance costs that are dependent on plant output (often referred to as variable costs), and the plant heat rate. The analysis examines summer months for the southeastern United States because it is the season when the highest demand for electricity occurs.

The three curves (see charts) show how some natural gas-fired generating units shifted ahead of some coal-fired units in the dispatch order (by moving down and to the left side on the curve) in response to changes in the relative prices of coal and natural gas. The supply curve for 2012 is also slightly below the curves for 2010 and 2011, reflecting lower marginal fuel prices than in prior years.

graph of southeast electricity dispatch stack in summer 2010, as described in the article text

Source: U.S. Energy Information Administration, derived from Ventyx Energy Velocity and EIA Form-923 data.
Note: Summer months include June, July, and August. The Southeast United States consists of the East South Central and South Atlantic U.S. Census Divisions.

graph of southeast electricity dispatch stack in summer 2011, as described in the article text

Source: U.S. Energy Information Administration, derived from Ventyx Energy Velocity and EIA Form-923 data.
Note: Summer months include June, July, and August. The Southeast United States consists of the East South Central and South Atlantic U.S. Census Divisions.
graph of southeast electricity dispatch stack in summer 2012, as described in the article text

Source: U.S. Energy Information Administration, derived from Ventyx Energy Velocity and EIA Form-923 data.
Note: Summer months include June, July, and August. The Southeast United States consists of the East South Central and South Atlantic U.S. Census Divisions.

The changes in electricity demand in the region can also be shown in these curves, by examining the location of the right side of the curve. The point where the curve slopes steeply upward indicates the total electricity generated in the region for a given period. Since the overall level of electricity generation is determined by the demand for electricity, the farther to the right the curve goes, the higher the demand for the respective year.