In our June Newsletter, http://www.appenergy.com/appenergy/ we discussed the medium-term future of gas and electricity prices. The energy market’s consensus, as reflected in prices for future contracts, is that the substantial increase in natural gas production in 2011 and the first half of 2012 will continue and will hold overall rising prices to about 5-7% a year.

In our email on July 20th, we also commented on the importance of following futures market pricing (for the month of your contract renewal), rather than spot market pricing.

Today, we’re examining another factor that could have a significant effect on future pricing in the Mid-Atlantic States – the retirement of a significant number of coal-fired generators in 2013 and 2014.

Lower natural gas prices make coal-fired generation less competitive with natural gas-fired generation and tend to reduce the overall wholesale electricity price, further reducing revenues for coal-fired generators. Nationally, generator owners and operators have reported to EIA that they expect to retire almost 27 gigawatts (GW) of capacity from 175 coal-fired generators between 2012 and 2016. (1 gigawatt equals 1000 megawatts or 1.34 million horsepower – enough to power a medium-sized city).

To put these figures in perspective, in 2011 there were 1,387 coal-fired generators in the U.S., totaling almost 318 GW. The 27 GW of retiring capacity amounts to 8.5% of total U.S. 2011 coal-fired capacity

The coal-fired capacity expected to be retired over the next 5 years is more than 4 times greater than retirements performed during the preceding 5 year period (6.5 GW). Moreover, based on EIA data, the approximate 9 GW of coal-fired capacity retirements expected to occur in 2012 will likely be the largest 1-year amount in the Nation's history. The record is, however, expected to be short-lived as almost 10 GW of coal-fired capacity are expected to retire in 2015. Mid-Atlantic Effects – see map below.

Most of the generators projected to retire are older, inefficient units primarily concentrated in the Mid-Atlantic, Ohio River Valley, and Southeastern U.S. where excess generation capacity exists. Lower natural gas prices, higher coal prices, slower economic growth, and the implementation of environmental rules all play a role in the retirements.

At this stage, it’s not clear what the net effect of these expected closures will be on prices. On one hand, switching generation from coal to natural gas will increase the demand for natural gas and push gas prices upwards.

On the other hand, generation plants powered by natural gas are significantly more efficient than the older coal-fired plants being retired, so less total energy will be required pushing electricity prices lower.