Weak prices and sagging demand could see gas supply most of Britain's electricity well into winter, sidelining coal plants and cutting Britain's carbon emissions as a welcome side effect.
Gas is usually favored for round-the-clock power generation in summer when low demand for heating keeps the fuel price low, swelling gas-fired power plant profits, known as spark spreads.
Coal-fired power profits usually become more attractive in mid winter when heating demand for gas is strong, making coal the main baseload power supplier and pushing gas to a marginal role.
But global gas demand has fallen sharply in 2009, while liquefied natural gas (LNG) production has surged, leading to oversupply and a fall in British gas prices -- something which could keep coal on the margins into December.
The UK is going to be very comfortably off for gas this winter. There should be plenty of LNG cargoes out there available at reasonable prices, Graham Freedman, senior power and gas analyst at Wood Mackenzie in London, said.
There is a certain weakness in the market and come winter time you might find there is quite a lot of gas out there on the market.
Freedman estimates that if carbon emissions and coal prices remain roughly stable, gas would remain competitive up to about 40 pence per therm, although coal plants could come into the baseload market with gas above 37 pence.
Forward contract prices indicate gas will continue to dominate power generation in Britain until at least the end of October and probably into November.
Forward gas contracts for December were trading around 43 pence on Wednesday, making coal look more competitive. But forward gas prices have tended to be much higher than spot prices turned out to be over the last few winters, which could point to cheaper gas fired generation than the forward market suggests, traders say.
It's conceivable that the gas spot price will continue to drop (compared to the forward price) for the fourth quarter. I don't see this year as being any exception, Freedman said.
Gas demand surges in winter because it is used to heat two thirds of Britain's homes. This usually makes it relatively expensive for the next biggest users of gas, power generators, who typically switch to burning coal before switching back to gas generation during spring when gas is cheaper.
But the gas market looks so comfortably supplied for this winter that forward contracts for the six-month period currently cost about the same as summer 2010, partly because global gas demand is expected to recover, so there is also less incentive to hold back on gas generation.
You are going to see gas running harder than maybe you have seen in previous winters on the back of relatively low winter gas prices, compared to next summer, but also on the back of lower demand, a senior trader at a UK utility said, adding that less coal burning would help cut Britain's carbon emissions.
Lower demand for electricity in Britain's recession and the expected start up of a big new gas plant (CCGT) in late summer mean marginalized coal plants will have fewer users left unsatisfied by gas or nuclear output to supply.
While gas looks like it may have a longer run this winter, coal could play a bigger role, especially in November, if the winter gas price rise and lower coal costs seen this week continue.
Certainly prices last week on the forward curve would have suggested CCGTs at the margin just in some of December, January and February with CCGTS running baseload except for those months, the trader at the utility said.
According to National Grid coal was main baseload plant from last November to early February 2009, with the exception of the Christmas period, because it was more profitable even with the higher cost of carbon emissions permits for more polluting coal, known as the clean dark spread.
Gas has been the first choice fuel ever since, as the normal summer fall in gas prices has been accentuated by big imports of LNG, driving short term clean spark spreads to around three times the coal equivalent.
Firm carbon emissions prices and steady coal prices, which had started creeping up again until this week despite weak European demand, have helped keep gas plants running flat out while many coal plants stand idle.
Gas has fallen a lot quite recently relative to coal, an energy market analyst at a major trading house said.
Gas is likely to run baseload in October and November this year. Then coal becomes cheaper in December, January and February, he said, adding that the tendency of spot gas prices to turn out lower than forward market prices could mean gas run plants for longer.
At least for January and February, often the coldest months and gas prices supported by concerns over possible Russian gas supply cuts to Europe, coal looks far more profitable and many traders expect coal prices to weaken further because stocks are filling up fast.