AEP switching back to coal as Natural Gas prices rise

                                                          Wed Oct 24, 2012 12:50pm EDT 


By Jeanine Prezioso 

NEW YORK Oct 24 (Reuters) - American Electric Power Co Inc , which burns mostly coal to generate electricity, said on Wednesday it has increased the use of natural gas-fired electricity by 50 percent year-to-date as the cost of the fuel has generally remained lower. 

But a recent rise in gas prices above $3 has forced the generator back to using coal in the near-term, indicating the precarious and narrow ledge the two fuels share until more gas-fired capacity is built as coal units are expected to retire. 

"The coal capacity is picking back up," said Nick Akins, AEP president and chief executive, during the company's third quarter earnings conference call on Wednesday. "For us, you get into the gas price of $3 to $3.25 per (million British thermal units) and you will start the switch back to coal." 

U.S. power generators have switched to using natural gas more consistently beginning in 2009 when production peaked and prices began to drop. 

But on a fuel cost basis, gas has become more expensive to burn since September when coal prices slipped to their lowest level in more than two years. 

Natural gas prices had dropped to a 10-year low in April just below $2, which prompted some switching in the months following, but forecasts for a colder winter this year that will increase demand for the fuel to heat homes have provided a recent lift. 

Gas futures prices have steadily and sharply risen above $3 per mmBtu since Sept. 24. 

In addition, production that has somewhat flattened, relative to giant leaps seen between 2009 and 2011, has aided market perception that the balance between supply and demand is tighter, helping to boost prices. 

AEP owns and operates some 80 power generating stations in the United States, totaling about 38,000 megawatts. About two-thirds of that is coal-fired generation, it says on its website. 

The company's coal mines are located close to its power plants and it has favorable contracts for the fuel that help to keep the cost of switching back to burning coal lower, Akins said during the call.