Gas-fired generation takes backseat to coal as wind speeds in SPP ebb

A seasonal decline in wind generation in the Southwest Power Pool this month has provided renewed momentum for fuel switching there as higher priced natural gas continues to be edged out by coal.

In July, windmills have generated an average 157,000 MWh in SPP, marking a nearly 24% decline from the 206,000 MWh averaged by wind last month, data from the Independent System Operator shows.

In 2020, wind generation in SPP staged an even steeper mid-summer decline, falling about 37% to an average 174,000 MWh generated in the full month of July from the 277,000 MWh averaged in June.

Last summer, power generation lost from wind was replaced roughly equally by gas and coal.

This summer, as wind speeds ebb, generators across the midcontinent appear to be opting mostly for coal as a backup fuel. In July, coal power has yielded an average 376,100 MWh, representing about 47% of SPP's generation share. That's up from an average 331,000 MWh and a 41% market share last month.

Slower wind speeds and hot summer temperatures in the Midcontinent this month have done little to stoke demand for gas. In fact, gas-fired power generation in SPP has declined by an average 7,000 MWh from June to July. The fuel's market share has also fallen to about 24% this month from nearly 25% last month, ISO data shows.

Higher gas prices are the likely reason for the growth of coal as a backup fuel in SPP.

Prices, weather

In July, cash prices at hubs across the Midcontinent have climbed into the mid-$3s/MMBtu, having gained more than 75 cents/MMBtu, or nearly 30%, since the start of June.

At the region's benchmark location, NGPL Midcontinent, spot gas has averaged $3.41 this month – more than double its month-to-date average of just $1.56/MMBtu last July, S&P Global Platts data shows.

Higher prices have limited the upside potential for gas-fired cooling in the Midcontinent this month, despite similar weather from June to July. Month to date, population-weighted temperatures in the region have averaged about 77 degrees Fahrenheit, down only a fraction of 1 degree since June.

Power burn in the Midcontinent, which is a slightly smaller geographic area compared to the Southwest Power Pool's service territory, is also little changed this month, rising less than 150 MMcf/d since June.

Outlook

Recent strength in the forward gas markets implies limited upside potential for gas generation in SPP this summer, regardless of recent weakness in wind output there.

At market settlement July 12, the NGPL Midcontinent July-August-September strip settled at an average $3.50/MMBtu, setting a fresh new high for peak-summer forward curve, S&P Global Platts' most recently published M2MS data shows.