Buoyant gas prices lift coal-fired power in MISO as gas generation fizzles

Rising gas prices in the Midwest Independent System Operator territory are giving coal-fired power generation an edge over gas recently in a trend that's likely to accelerate into the winter months.

In August, generation share for coal in MISO has climbed to an estimated 45% – up just one-half percentage point from July, but sharply higher compared to the fuel's 40% market share in June.

Over the same 11-week period, gas generation in MISO has declined steadily. In August, gas accounts for just over 29% of total generation, down from 31.5% in July and nearly 33% in June, ISO data shows.

The inversely correlated market trends for coal and gas come as prices for the latter continue to rise.

At regional benchmark Chicago city-gates, cash prices have averaged $3.90/MMBtu in August, up about 30 cents from the prior month and nearly 80 cents since June. Compared to summer 2020, the rise in gas prices is even more stark. June 1 to date, the Chicago cash market has averaged $3.48/MMBtu – more than double last summer's average of just $1.67/MMBtu, S&P Global Platts data shows.

Power burns

Higher gas prices and ascendent coal-fired generation have depressed power burn demand in MISO this summer, despite population-weighted temperatures comparable to those recorded last year.

Over the past 11 weeks, gas-fired power burn in the Midwest ISO has averaged about 4 Bcf/d, according to Platts Analytics – a 700 MMcf/d, or nearly 15%, decline compared to summer 2020.

Across the US Midwest, population-weighted temperatures are nearly flat over that period, averaging 74.3 degrees F since the start of June, down only marginally from an average 74.5 degrees over the corresponding period last summer.

The drop in gas-fired power burn has defied a wave of recent coal-plant retirements in MISO, which had lent fleeting strength to gas generation earlier this summer. In June, the shuttering of Hoot Lake units 2 and 3, R. Gallagher units 2 and 4 and Petersburg Station 1 permanently removed over 650 MW of coal-fired capacity in MISO.

Outlook

During the upcoming winter months, gas generation will likely face further downward pressure in MISO.

At the Chicago city-gates, calendar-month forwards for January and February have seen settlement prices top $4.75/MMBtu recently, signaling more price pressure on gas in the generation stack this winter.

Upcoming coal plant retirements in MISO could be a potentially mitigating factor for power burns.

The shuttering of Genoa Station 3 in December 2021 and the closure of Meramec units 3 and 4 in January 2022 will eliminate nearly 900 MW of coal capacity in MISO this winter. The continued retirement of coal capacity in MISO, and other ISO territories, is a trend that's responsible at least in part for the growing price inelasticity of gas-fired power.

Assuming temperatures in the Midwest trend close to normal this winter, power burn demand in the region should average around 2 Bcf/d during the peak-demand months of December, January and February.

Over the same period last winter, significantly lower gas prices propelled power burn demand in the Midwest to nearly 2.5 Bcf/d, Platts Analytics forecast and history data shows.