Reversal in MISO fuel-switching trend highlights emerging risks for coal

Coal-fired power has begun ceding market share to natural gas in the Midwest Independent System Operator recently, reversing a months-long fuel-switching trend precipitated by high gas prices.

Over the past two months, weekly-average generation share for coal in MISO has declined steadily to about 32% in late October, down from nearly 48% in early September, data from the ISO shows.

The drop in overall coal generation comes, in part, due to higher wind speeds.

Cooler temperatures, though, also appear to be playing a role. Since late August, total power generation across the Midwest has declined by more than 300 GWh, or about 32% with coal-fired power taking the biggest hit.

The overall drop in MISO power demand has had a disproportionately smaller impact on gas generation, which has held relatively steady – gaining in market share as a result. In late October, gas now accounts for about 32% of total Midwest generation, compared with just 23% in early September.

Gains for natural gas in the MISO generation stack come even despite rising gas prices – the motivating factor behind much of the fuel switching to coal that occurred this past summer.

On the NYMEX, prompt-month futures at the benchmark Henry Hub were down just 2 cents in Oct. 26 trading to $5.88/MMBtu – appreciably higher compared with prices in the mid- to upper-$4s/MMBtu in early September, data from the CME Group and S&P Global Platts showed.

Coal supply

The changing fortunes for gas and coal in the Midwest generation stack come amid growing signs that coal supply may be facing constraints – a factor that could affect the broader US power market this winter.

In it's latest short-term energy outlook, published Oct. 13, the US Energy Information Administration acknowledged the lower price responsiveness of coal for power generation recently, pointing to emerging constraints on coal supply and low coal stocks.

"Production growth is unlikely to match the increases in demand in the near term due to many coal mines operating at a reduced capacity and limited available transportation," the report noted.

Weekly coal production data recently published by the EIA also supports the idea that supply constraints could be emerging, showing a drop in production to 10 million short tons in the week ended Oct. 16, down from 11.8 million st the previous week.

Stockpile estimates recently published by S&P Global Platts Analytics were also revised downward in the US Coal Market Forecast released Oct. 21. The new forecast reflects a decline of more than 40 million short tons in September and October, compared with year-ago levels – equivalent to a roughly 30% drop in pre-winter coal inventories this season compared to last.

Price outlook

If enduring, a near-term drop in coal supply this winter could be bullish for the gas market.

Reduced capacity available for fuel switching could prolong or even amplify the downward trend in coal-fired generation in the Midwest Independent System Operator – and potentially other ISOs.

Gas markets may already be pricing in the emerging risk to coal capacity this winter. In late October, winter-season gas prices have surged with the December, January and February forwards contracts at the Henry Hub climbing about 80 cents over the past week to over $6/MMBtu, S&P Global Platts' most recently published M2MS data shows.