US Upper Midwest gas-fired generation looks to remain strong despite high prices

Gas-fired power demand in the US Upper Midwest might prove more than expected in the months ahead despite high prices, due in part to nuclear retirements, ample storage inventory and stronger-than-average power burn per degree this summer.

The Midwest power burn forecast looks poised for substantial upside risk in the coming months as natural gas generation is less responsive to Chicago prices than in years past, burns per degree have risen from the five-year average, and the possibility of nuclear retirements all point to stronger gas burn than forecast.

S&P Global Platts Analytics expected power burn to be lower year on year for the shoulder season of September and October. September power burn is forecast to average 1.9 Bcf/d, 558 MMcf/d below September 2020. For October, the year-on-year losses are expected to grow to 845 MMcf/d, bringing power burn to 1.7 Bcf/d.

Platts Analytics' power burn forecast largely utilizes temperatures and prices and assumes normal temperatures when modeling. September and October are shoulder months when temperatures normally cool to 60 degrees Fahrenheit, resulting in less cooling demand in the region and weakening power burn. Prices, meanwhile, are substantially higher year on year.

Chicago futures for September are currently trading roughly $2/MMBtu above September 2020 cash prices, at $3.81/MMBtu. October is also at $3.81/MMBtu and $1.72/MMBtu above 2020 cash prices. These stronger prices and shoulder season temperatures should result in lower power burn.

However, power burn has been less responsive to prices this year. Typically, higher prices result in higher gas-to-coal switching. While previous years show a clear downward curve in gas' share as prices rise, this year has been much flatter, showing less influence of prices on gas generation.

Also, burns per degree are slightly above normal. While last year's weak prices uplifted power burns, this year's stronger-than-normal prices should have weakened burns per degree. Instead, burns per degree have risen compared with the five-year average. At roughly 60 degrees, the normal temperature in September and October, burns per degree are marginally above normal.

On top of the already higher burns per degree, Exelon is still planning to retire two nuclear facilities in the Midwest in September. The two facilities provide 4.4 GW of capacity in the Midwest. Their loss could result in as much as 770 MMcf/d of additional demand, should the entirety go to gas generation, though Platts Analytics expects the majority of gains to go to coal generation.

While power burn is likely to dip the coming months, the year-on-year losses may not be as severe as normal weather and Chicago futures point to. This, in turn, would likely further help boost prices into the winter.