September 27, 2012 / 2:47 PM / 8 years ago

U.S. utilities may return to coal as natgas prices rise

(Reuters) - The recent rise in U.S. natural gas prices and decline in coal prices is set to put a dent in demand for natural gas as some utilities resume using more coal to generate electricity.

A mild winter that left a huge amount of gas in inventory and record-high natural gas production pushed prices to 10-year lows in April, luring power companies away from coal.

But the spread between NYMEX Central Appalachian coal and Henry Hub natural gas futures on Thursday reached its widest in more than a year as gas prices rebounded from lows plumbed earlier this year, making gas less of a bargain.

The relative price difference on Thursday reached $1.25 per million British thermal units (mmBtu), according to Reuters data — the widest since August 2011, which could be enough to discourage more use of natural gas in electricity generation.

Energy traders have said it costs about $1 per mmBtu to transport Eastern coal, so when natural gas prices are higher and the coal discount is over $1 per mmBtu, it starts to make economic sense to burn coal rather than natural gas.

If the coal-to-gas spread reaches $2 mmBtu (with gas $2 more expensive than coal) it would be the first time it was that wide since January 2011.

In April, natural gas, historically more expensive than coal, traded at a 10-year low of $1.902 due to oversupply, while coal fetched about $2.13, according to the Reuters data. The 22-cent discount was the lowest since 2001.

Since then, gas prices have rebounded to $3.28 per mmBtu, but coal, which is typically priced per ton, dipped to about $52 per short ton, or the gas price equivalent of $2.03 per mmBtu.

Some power plants are already moving back to coal, a trend set to increase with gas prices expected to continue rising ahead of the peak-demand winter heating season.

The biggest U.S. coal-fired power companies include units of American Electric Power Co Inc (AEP.N), Duke Energy Corp (DUK.N), Tennessee Valley Authority, Southern Co (SO.N), Xcel Energy Inc XEL.N, NRG Energy Inc (NRG.N), GenOn Energy Inc (GEN.N) and FirstEnergy Corp (FE.N).

Additional reporting by Joe Silha in New York; Editing by Maureen Bavdek

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