Hot weather, lower wind output lift gas generation; prices remain a risk

Toasty early-summer weather and falling wind generation have lifted US gas-fired power burn to seasonal highs this month, but rising gas prices threaten to put a damper on the rally.

On June 9, total demand from generators topped 39.6 Bcf/d, marking a record high for demand in any late-spring period prior to the June 20 official start to summer, S&P Global Platts Analytics data shows.

This month's record came as population-weighted temperatures along the Eastern Seaboard, the Southeast, and Texas topped 80 degrees Fahrenheit, spurring a wave of electric cooling.

Power burns this June, though, have outperformed even on a temperature-adjusted basis.

On June 9, the US population-weighted temperature neared 77 F — a high, but not atypical, temperature for early June. Last year, and in prior summer seasons, similar temperatures have resulted in substantially lower gas demand from generators.

Wind generation

Beyond this month's toasty temperatures, falling wind generation also appears to be a contributing factor behind the recent rally in gas-fired power. In both the Southwest Power Pool and the Midwest Independent System Operator, gas has picked up market share this month as wind output has declined.

In SPP, wind generation has dipped to an average 185,500 MWh in June, down from about 260,600 MWh in May. Market share for gas over that period has climbed to nearly 25% this month, from about 19% last month, ISO data shows.

In MISO, wind generation has also declined this June, averaging about 137,300 MWh month-to-date, compared with an average 168,000 MWh in May. Market share for gas in MISO is also up as a result, climbing to about 33% this month compared with an average 28% last month, MISO data shows.

Burn outlook

Despite the recent single-day record, power burn this month remains slightly below its year-ago level.

US-wide, burns are averaging about 35.4 Bcf/d this month, compared with levels closer to 35.7 Bcf/d month-to-date last June. Over the next two weeks, rising temperatures are forecast to lift this month's average to around 36 Bcf/d — potentially outperforming demand that registered closer to 35.2 Bcf/d over the first three weeks of June 2020, Platts Analytics data shows.

Higher gas prices this year compared with the last could put a damper on generator demand this month, and potentially through the remainder of the summer season. Through much of the first quarter, higher gas prices were likely to blame for lower burns this year compared with those recorded in Q1 2020.

So far this year, US Henry Hub gas has traded at an average $3.11/MMBtu — pulled higher in part by a brief series of record-high settlement prices in mid-February. By comparison, over the same roughly six-month period last year, the benchmark price averaged just $1.79/MMBtu.

In SPP, MISO, PJM, and ERCOT, a wave of economically motivated fuel switching have slashed market share for gas this year as numerous generators opt for lower-priced coal generation, ISO data shows.

Hot weather this summer could be a partially offsetting factor — potentially boosting total generating-capacity utilization as demand for electric cooling rises. According to the National Weather Service's most recent seasonal outlook, temperatures across nearly every US region face a 33% risk, to as much as a 60% risk, to remain above average in June, July, and August.