AEP, Peabody Hint that 'King Coal' Could Return to the Throne in 2013

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Researched by Industrial Info Resources (Sugar Land, Texas)--American Electric Power (NYSE:AEP) (AEP) (Columbus, Ohio) held its third-quarter earnings call last week and covered all the expected financial issues. One interesting additional item was the discussion of the recent trend of coal-to-gas switching that the industry saw during 2012. This was prompted by a mixture of coal plant retirements where environmental retrofits were needed to bring plant emissions into compliance with a series of environmental regulations passed by the U.S. Environmental Protection Agency (EPA); and by the recent record lows in natural gas prices.

For more information, see July 10, 2012, article - Coal's Share of Power Generation Falls, Natural Gas Rises to Take its Place.

"Actually, we've seen switching going back the other direction," said Nick Akins, AEP's CEO. "The capacity factors of the gas units are starting to drop; the coal capacity is picking back up. For us, you get into the gas price of $3 per million British thermal unit (MMBtu), or $3.25 per MMBtu, you're going to start that switch back to coal." New York Mercantile Exchange natural gas futures prices have remained above $3 per MMBtu since the end of September. Akins also added that this price was probably still too low for many other utilities to start switching back to coal, and that AEP had a competitive advantage because its coal supplies were closer to its plants than most of their competitors, making switching back (and forth) easier.

On the coal pricing and production side, mine closures, production cutbacks, and reductions in capital expenditures have not prevented one of the nation's leading coal mining companies, Peabody Energy Corporation (NYSE:BTU) (St. Louis, Missouri), from being optimistic about coal. In its third-quarter earnings release, it said coal should pass crude oil as the world's largest energy source next year as everyone from the U.S. and China to Europe, Japan and India continue to increase coal-fueled electricity generation and steel production. "We are seeing record global coal imports, increasing coal generation, and improving U.S. coal consumption from higher natural gas prices," said CEO Gregory Boyce.

This possible reversal in the trend of coal-to-gas switching is also borne out by U.S. Energy Information Administration (EIA) numbers released on October 19, showing that coal produced "39% of U.S. electricity, up from a low of 32% in April 2012, when the natural gas share of generation equaled that of coal." The EIA went on to say that "increased demand for electric power in the summer months--to run air conditioners--created more room in the market, and generation from both fuels increased between April and July."

While the coal share of generation in August was up from its 32% low earlier this year, it was still lower than the 50% annual average over the 1990-2010 period.

Industrial Info is tracking more than 55 gigawatts of generation due to be retired in the next decade for a variety of reasons, and it will track the switch from coal to gas (and back again?). Industrial Info's customers can track both the Power Industry and the coal-fired database in North America and follow the trends for themselves.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.