Gas-to-coal switching in MISO, SPP risks Midwest summer power burn demand

Denver — Higher natural gas prices compared with year-ago levels are driving a wave of gas-to-coal switching in multiple Independent System Operator territories, potentially posing a threat to summer power burns.

At key downstream market hubs across the central US, like the MichCon city-gates, Northern Ventura and NGPL Midcontinent, month-to-date cash prices are up about $1/MMBtu compared to March 2020.

At other locations within the Midwest Independent System Operator and the Southwest Power Pool, prices have made similar gains and are now trading in the mid-$2s/MMBtu, prompting many generators to make the switch from away gas to coal.

Generation share

In MISO, generation market share for natural gas has fallen to about 25% month to date – down from over 33% in H1 March 2020, S&P Global Platts Analytics data shows.

Over the same 12-month comparison period, market-share for coal in MISO has climbed to nearly 38% – up about 10 percentage points. Cheaper coal-fired generation even appears to be bridging the gap from lower nuclear output this month, which has seen its own market share in MISO decline as a result to an average 16%, compared to 19% last March.

In SPP, higher wind output this month compared to last March is likely responsible at least in part for the decline in gas-fired generation there. Month to date, wind power has captured an impressive 47% of the total market, up from 37% a year ago. While market share for natural gas has declined about 12 percentage to an average 15% this month, coal-fired generation is up and now accounts for 27% of total generation, versus 23% in the year-ago period.

In both ISOs, total month-to-date generation is higher compared to last March. In MISO, generation has climbed about 0.7% to an average 659,000 MWh. In SSP, total generation is up almost 3.6% to an average 1,537,000 MWh.

Power burn

Falling market share for natural gas in MISO and SPP is already taking a toll on gas-fired power burn in the Midwest this month. March to date, gas demand from regional power generators has averaged just below 2 Bcf/d, down about 350 MMcf/d or 15%, compared to March 2020, Platts Analytics data shows.

Assuming the trend continues into the summer months, power burns could see even larger declines. From June to September 2020, Midwest power burn averaged about 3.5 Bcf/d. With significantly higher gas prices in play this summer, current forecasts show that figure falling about 1 Bcf/d, or about 29%, over the same fourth-month period – even assuming average summer temperatures.

Currently, Midwest forward gas markets are pricing third-quarter supply in the mid-$2s, with prices at MichCon city-gates, Northern Ventura and NGPL Midcontinent all hovering near $2.40/MMBtu – close to current cash levels, S&P Global Platts data shows.