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Gas Market Rally Prompts Switching in Central US Generation Stack

November 8, 2019 - The precipitous rise in US natural gas prices over the past two weeks is already prompting gas-to-coal switching -- a change that, if enduring, could significantly lower power burns this winter.

Since late October, NYMEX prompt-month prices have climbed about 21%, or nearly 50 cents. On Friday, the December contract traded up about 2 cents to $2.79/MMBtu, S&P Global Platts data showed.

Higher prices are driving a notable shift from gas to coal-fired generation this month, particularly in regional transmission organizations across the central US.

In PJM, gas as a percentage of thermal load dropped to 60% from October 29 to November 7, down from a 67% share during the first 28 days of October, Independent System Operator data shows.

Similar switching trends are underway in MISO and SPP, where gas shares have dropped by 5 percentage points and 13 percentage points, respectively, according to ISO data.

Assuming winter-season gas prices remain near current levels in the upper-$2s/MMBtu, US power burn levels could decline as much as 700 MMcf/d, according to a forecast from S&P Global Platts Analytics.

Weather, Prices

The blast of early winter weather that prompted the uptick in gas prices looks likely to stick around this month, potentially giving more momentum to the rally -- and to fuel switching in the generation stack.

Over the next eight to 14 days, the eastern half of the Continental US will see a 30%-60% risk for below-average temperatures, a forecast released Thursday by the National Weather Service shows.

In late October, an outlook published by the agency predicted that below average temperatures in the Midwest and the East would endure for the entire month of November.

On Thursday, balance-of-month gas prices at the Henry Hub settled at $2.74/MMBtu, with the December and January calendar-month contracts now priced at $2.77 and $2.86/MMBtu, respectively, Platts most recently published M2MS forwards data shows.

Power Burn

Since the start of October, US power burn levels have averaged nearly 29 Bcf/d, marking their highest on record for the period and about 1.2 Bcf/d stronger compared with the same five-week stretch last year.

Stronger burns should come as no surprise to market observers.

Over the past year, changes to the power generation stack -- including coal retirements and the addition of combined cycle gas turbines plants, or CCGTs -- have added new structural demand in the market.

Within the coal industry, looming retirement of the 2,400-MW Navajo Generating Station by the end of this year, could alone drive replacement burns totaling up to 200 MMcf/d this winter.

Retirement of about 2,000 MW of Vistra-owned coal plants in the US Midwest, combined with the anticipated closure of some 600 MW at the Colstrip power plant in Montana, could add another 120 MMcf/d in winter-season replacement burns, according to Platts Analytics.

On the gas side, annual growth in CCGT capacity totaling about 5,000 MW could add another 300 to 400 MMcf/d in incremental gas demand from generators, assuming normal weather conditions prevail.