Cheap natural gas changes generation dispatch in Southeast

The electric power industry in the southeastern U.S. has undergone 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, according to the Energy Information Administration (EIA).

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 an impact on the electricity generation mix.

Historically, coal-fired generating units supplied a large share of the demand for electricity in the southeastern U.S., 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 percent of the region's electricity generation, while natural gas accounted for only 26 percent.

In contrast, during summer 2012, natural gas accounted for 34 percent of the region's overall generation, and the coal share dropped to 42 percent. Summer 2012 saw a 40 percent 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 percent increase in the use of natural gas for generating electricity in the region over the same time period.

Generally, operators dispatch power plants based on their variable costs of generation, of which a key input is fuel costs. In the southeastern U.S., EIA estimates that the approximate fuel-related variable cost of natural gas plants in the summer months fell 43 percent 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.

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