Stronger gas spot prices on year increase gas to coal switching in MISO, SPP

Houston — Natural gas spot prices in the Midcontinent have strengthened year on year, widening gas to coal premiums in the region and providing downside risk to natural gas generation.

Gas prices across the Midcontinent have been trading around $1/MMBtu higher than 2020, with Natural Gas Pipeline-Midcontinent Pool spot prices averaging $2.70/MMBtu so far this month, 64% above last year during the same period.

Chicago city-gates prices have seen a similar rise year on year, averaging $2.78/MMBtu, compared to the average of $1.73/MMBtu last year, according to S&P Global Platts Pricing data.

Strong prices have come as temperatures in the region have averaged 2 degrees below the five-year average this May, keeping heating demand elevated in the region, averaging 10.5 Bcf/d so far this month, according to Platts Analytics.

With increased prices this year, the spread between coal and natural gas has widened. The premiums of NGPL-Midcon Pool and Chicago to Powder River Basin coal have both added $1.1/MMBtu to $1.98/MMBtu and $2.07/MMBtu, respectively, compared with May 2020. Wider spreads this year have made coal more attractive for power generation in comparison to natural gas, increasing gas to coal switching.

In the Midcontinent Independent System Operator, natural gas' share in the generation mix has fallen 9% year on year to an average of 27% year to date, while coal has gained 11% to 39% over the same period, according to MISO data.

The Southwest Power Pool has seen a similar drop in natural gas usage of about 45.6 GWh to 134 GWh compared with last year as coal has added 49 GWh, taking up 30% of the generation stack so far this May, SPP data showed.

The NGPL-Midcon Pool average for the remainder of summer contracts has risen 29 cents since last month to $2.8/MMBtu May 20, according to Platts M2MS data. Similarly, Chicago city-gates remainder of summer contracts have gained 30 cents over the same period to $2.88/MMBtu, showing stronger prices ahead. This could widen the spread between gas and coal even further and provide upside risk for gas to coal switching.

Higher natural gas prices compared to coal have not only been putting pressure on power demand in the Midcontinent but across other regions as well. Natural gas generation share has steadily declined each month since it peaked in July 2020 at 44.8% across the US, according to the Energy Information Administration's Power Monthly April 29, when Henry Hub was pricing at a low of about $1.50/MMBtu.

By February, gas share in the US had declined to 34.1%, the lowest it's been since January 2019. The drop was driven by an increase in pricing. Since last summer, Henry Hub prices have risen and largely remained between $2.50-$3/MMBtu.

Above $2.50/MMBtu, Powder River Basin coal, which is largely used for power generation, historically becomes competitive with gas, while Illinois Basin coal begins competing when gas is about $3/MMBtu.

Coal generation share has seen a steady increase each month from its most recent low of 19.1% in October 2020 to 26.9% in February, according to the EIA's most recent data, as gas prices have remained at a high.

Throughout the coming summer, both the EIA and Platts Analytics forecast coal generation share to remain about 24%-25% given current expectations.