Coal beats wind in SPP 2021 fuel mix; power prices expected to follow gas, coal lower

Coal is expected to beat out wind for the top spot in the Southwest Power Pool's generation fuel mix for 2021, but wind could regain the lead in 2022 due to ongoing shifts in natural gas and coal supplies.

SPP in 2020 became the first grid operator in the US to have wind at the top of its generation stack. While wind was expected to come out on top in 2021, high natural gas prices ended up giving coal-fired generation a leg up in the generation mix.

"This resulted in coal being a more economic option, and it replaced some natural gas production," SPP spokesperson Meghan Sever said in an email. "Wind has been contributing significantly during the fourth quarter of 2021, but as of now, it appears it will still come in slightly under coal."

Coal accounted for 35.5% of the total fuel mix through Dec. 15, while wind made up 35.2% of the mix, according to SPP data. Wind has increased from less than 14% of the total fuel mix in 2015, when coal made up 55.2% of the mix, to lead the mix at nearly 32% in 2020, when coal made up 30.6%.

But wind could come out on top again in 2022 due to steady capacity additions and headwinds around coal burn, said Giuliano Bordignon, a power analyst with S&P Global Platts Analytics.

Capacity changes

Nearly 525 MW of capacity in SPP retired in 2022 -- 456 MW in natural gas-fired generation and 66 MW in fuel oil -- according to the latest Platts Analytics North American Electricity Short-Term Forecast.

At the same time, SPP is expected to add more than 8.2 GW of new generation capacity in 2022, according to the operator. The majority -- 4.377 GW -- would be wind, followed by 3.094 GW of solar and 740 MW of battery storage.

Half of the states in SPP's footprint rank in the top 10 for US wind capacity, according to the American Clean Power Association's quarterly report for Q3 2021.

Forward curve

Power forwards had a sharp reaction to the February storm and resulting rotating outages, jumping and continuing to trend upward throughout the year to more than double where 2021 packages were a year ago. SPP set a new winter peakload record of 43.661 GW Feb. 15, surpassing a three-year record. Spot prices reached record highs that same day as South Hub on-peak day-ahead locational marginal prices reached $3,360.72/MWh and North Hub on-peak day-ahead LMP reached $3,202.59/MWh.

Summer forwards were trending higher than 2021 packages, but have weakened since reaching package highs in the upper $50s/MWh in late-October. SPP South Hub on-peak July is currently in the low $50s/MWh while the August package was in the upper $40s/MWh, 42% and 49% higher than the 2021 packages a year ago, respectively, according to S&P Global Platts data.

The spike in futures could be attributed to a spike in natural gas production in late-October amid market concerns of the winter supply outlook. Although wind makes a large portion of the fuel mix in SPP, natural gas has accounted for nearly 20% of the total fuel mix year to date, according to SPP data.

Forwards prices have been slipping since October.

"Low stockpiles at the beginning of 2022 and coal supply contracts signed at levels above 2021 pricing will consolidate coal-to-gas switching in the next several months," Bordignon said. "Power prices will largely follow the decline in gas and coal prices in 2022, but the downside could be accentuated by increasing wind penetration."

A similar trend was seen in winter packages. The three-month outlook indicated a greater probability for above-normal temperatures in SPP's southern region, with equal chances for above- or below-normal temperatures in the rest of the footprint, according to the US National Weather Service.

South Hub on-peak January is currently in the low $60s/MWh, 118% above where its 2021 counterpart was a year ago, after reaching a high of $94.70/MWh on Oct. 25, nearly 200% higher than the 2021 package last year, according to Platts data. Likewise, the on-peak February package is in the upper $50s/MWh, 113% above its 2021 counterpart, after climbing as high as $87/MWh Oct. 25, about 195% higher than the 2021 package a year ago.

Winter preparation

SPP is not forecasting any extreme operational conditions for the coming winter, but the threat of a cold snap is still a wildcard. For instance, SPP's reserves could be reduced to 0.8% during extreme conditions, the North American Electric Reliability Corp. said in its winter reliability assessment.

The largest unknown is derating of generation under extreme weather, Bordignon said. Only a small fraction of the SPP gas fleet has dual fuel capability, and the temporary freezing of coal stocks cannot be ruled out in a cold snap, he added.

However, SPP has 14 GW of intertie capacity that it can lean on in emergencies, Bordignon noted. As SPP highlighted in its review of the February weather event, imports played a significant role in meeting load, and the two most severe emergency alerts largely coincided with a sudden drop in imports, he said.