Another factor affecting coal-to-gas switching is that many power companies purchase coal on long-term contracts. The terms of most contracts are generally not public, but the IEA notes that “anecdotal evidence suggests that many firms have take-or-pay contracts.” This means power plants are either obliged to pay the contracted rate whether or not they want the coal, which effectively means they’ve contracted themselves to a minimum amount of coal consumption for the length of the contract. Contracts present a hurdle to increased coal-to-gas switching because even if natural gas prices plummet, a company may not be able to take advantage of the relative price difference between coal and natural gas. The IEA notes that 93% of the coal consumed for power generation in the US in 2011 was purchased through long-term contracts.
The IEA notes that of the 15 states with the longest average remaining contracts, four have combined-cycle gas turbine capacity of above 5 GW: Arizona, Pennsylvania, Mississippi, and Oklahoma, which are highlighted in the above graph.
Other factors affecting coal-to-gas switching include the following:
- Plant efficiency: On an individual plant basis, a higher-efficiency gas plant requires a lower natural gas price to make coal-to-gas switching economic
- Technological limitations: Factors such as minimum output for individual power plants, start-up rates, and ramp rates can all affect the ability and flexibility with which power producers can switch between natural gas and coal.
- Regulation: Due to differences in regulation, some power producers pass through changes to the cost of fuel directly to their customers, whereas others may not. Those who are able to pass on fuel costs to some degree may be less agile in switching to cheaper fuel costs.
- Distance: Because of the setup of the US electrical grid, a gas-fired plant needs to be not too far from a load being served by a coal-fired plant. Plus, congestion in the electrical grid system could limit the viability of a coal-to-gas switch. Also, in some states where coal-fired generation is used to serve the primary baseload, the distribution of the plants is a factor in maintaining the stability of the electrical grid. In these cases, coal-to-gas switching may be less viable if the distribution of CCGT plants isn’t comparable.
- Gas transmission networks: Many gas-fired generators opt for cheaper interruptible gas-transportation capacity rather than more expensive firm-contracted capacity. During peak gas demand periods in the winter (when natural gas is used for home heating), pipeline customers with firm-contracted transportation may use up most or all of the pipeline capacity, leaving little or no capacity for customers that opted for interruptible transportation. In some instances, this has left some gas-fired plants unable to receive the gas needed to run the plant, even if economic conditions would otherwise be favorable for coal-to-gas switching.