Unless gas prices stabilize, coal prices will continue rising.
Gas prices to power plants have surged in 2003, increasing more than 50 percent over their 2002 level. In absolute terms, this gas price in-crease exceeds $2/MMBtu-almost two thirds larger than average coal prices to power plants in 2003-and has rekindled interest in new coal-fired power plants. An increasing number of new coal-fired projects have been announced in the last 12 months. Recently, however, coal prices have begun to creep up, especially in the eastern United States. NYMEX-traded Central Appalachian spot-market coal has increased from $1.40/MMBtu to over $2.10/MMBtu since August 2003. Some new, long-term coal contracts have been signed at levels more than $1/MMBtu above current prices.
Because gas prices are unlikely to decline much in the near term, there is a growing possibility that coal prices may increase substantially in the future. The critical question is the extent to which this growth might occur and its impact on electricity generation and prices.
Figure 1 presents average, annual coal and gas prices to U.S. electric utilities since 1948. Through the mid-1970s, coal prices ran generally above gas prices, although gas prices were somewhat higher than coal prices in the early 1960s. With the first oil and gas price surge in the mid-1970s, coal prices also grew, exceeding $1/MMBtu for the first time in 1978. Through 1978, coal and gas prices tracked reasonably well, although gas prices grew faster. Following the second oil and gas price surge in 1979, coal prices continued to grow, but increasingly lagged the growth in gas prices. Coal prices peaked in the early 1980s, averaging $1.66/MMBtu in 1982-85, about half the gas price to power plants during this period.
When gas prices fell in the mid-1980s, coal prices began to erode. Between 1985 and 1995, coal and gas prices again tracked each other, but this time coal prices averaged 88 cents/MMBtu below gas prices. The decline in coal prices continued through 2000, despite growing gas prices. Since 2000, however, coal prices have begun to grow slightly, but at a negligible rate compared with the surge in gas prices. Through the first 10 months of 2003, gas prices exceeded coal prices by more than $4.40/MMBtu.
High gas prices have begun to push up peak electricity prices but have generally had much less effect on off-peak prices. However, off-peak prices have begun to show some noticeable growth in regions where gas increasingly has become the marginal electricity source for base-load electricity. While electricity prices generally have not increased sufficiently to accommodate high gas prices on a sustained basis, they have provided substantial, incremental economic rent to coal-fired power plants with low, long-term coal price contracts. The recently observed increases in spot coal prices and in some new contracts suggest that coal producers are attempting to capture some of the economic rent from coal-fired electricity generators.
Based on price differences between gas and coal from 1985 through 1995, it would appear that coal prices could grow more than $1/MMBtu over the next few years, if gas prices remain near current