This year, the U.S. electric power sector’s coal consumption is expected to drop below 900 million short tons for the first time since 1996 as the sector boosts its use of natural gas for power generation, according to the Energy Information Administration’s March Short-Term Energy Outlook.

The 2012 demand for coal in the sector is expected to fall about 5% to 884 million short tons. Conversely, power-sector demand for natural gas is expected to grow by almost 9% in 2012 to a record 22.7 billion cubic feet per day according to the EIA. Also, the share of U.S. power generation fueled by natural gas is expected to climb to 27.1% this year.

Meanwhile, at an average current forward strip price of $2.60 per MMbtu for natural gas, Bernstein Research analysts model 100 million tons net consumption loss of Appalachian coal from power utilities, according to a recent report. An additional loss of 82 million tons of Powder River Basin coal would accompany this displacement. The result would be a 3.3 trillion cubic feet (Tcf) annual increase in natural gas consumption for electricity generation, according to the analysts.

Bernstein analysts report that with spot natural gas prices of around $3.35 per Mcf in the fourth quarter of 2011, coal-fired generation did not experience its typical seasonal increase, as coal-fired plants are now 40% less efficient than combined cycle gas turbine (CCGT) plants. Based on futures prices, gas-fired generation will still be materially cheaper than coal.

“At 2012 forward gas prices, CCGTs cost $20 to $25 per megawatt hour to run versus $30 to $35 per megawatt hour for coal,” the analysts said. The implications are quite positive for gas-weighted power utilities such as Calpine Corp., which could have a 36% unregulated sales exposure to substitution at that price, and Public Service Enterprise Group Inc. which would have a 13.7% exposure, the analysts modeled. NRG Energy Inc. has the largest downside exposure given $2.60 natural gas.

This demand could drive gas prices back into the $3.90 per Mcf range during the next 12 months.

In a similar report, however, FBR Capital Markets analysts decried the “great coal-to-gas switching hoax,” and suggested that the maximum incremental switching for the 2008 vintage gas fleet is constrained to 1- to 2 billion cubic feet per day on average, falling below current expectations. FBR thinkers believe that mild winters and increased renewable generation exaggerated the real amount of switching during the past three years. They estimate that 50 to 55 GW of coal generation retirements through 2018 would occur, and spark a need for additional gas-fired generation to be built.

FBR believes utilities will see rate base increases and investment in oil and gas pipelines as a result of these market dynamics.

“By 2015, we expect 30% of the U.S. generation mix to come from gas, compared with 35% in 2011 and 20% in 2006,” which could eventually strengthen gas prices. At the same time, they believe coal will drop 6% during the next three years to just 36% of the mix.

“The impact on the transportation sector will grow with them, but the current impact of switching is de minimus, in our view.”