US gas-fired power burn demand is poised to continue outperforming well into 2022 as low coal production and stockpile levels likely persist, limiting price-induced fuel switching by power generators.
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Fourth quarter to date, US gas-fired power burn has trended at close to 30 Bcf/d, outpacing the prior three-year average by 1.8 Bcf/d, or about 6%, S&P Global Platts Analytics data shows.
Gas demand from power generators has been surprisingly strong recently considering this year's historically elevated gas prices. At the US benchmark Henry Hub, the NYMEX prompt-month futures contract has averaged just under $5/MMBtu in the fourth quarter, up more than 75%, or about $2.10, from its year-ago level, S&P Global Platts data shows
High gas prices have historically put a damper on generator gas demand. Recently, though, tightening coal supply and rising prices for the fuel have limited generators' ability to simply switch away from gas – a trend that has clearly emerged in late 2021 and appears likely to continue into the New Year.
The emerging pressure on coal-fired generation has become most clearly evident in the Midcontinent Independent System Operator's territory.
Since late summer, power generation share for coal in MISO has slumped, giving way to both wind and natural gas. In December, coal has accounted for just 30% of total power generation in the MISO – down from a nearly 45% share in August, data from the ISO shows.
Over the same period, wind gained about 10 percentage points to account for nearly 19% of MISO power generation in December. Gas made a smaller gain over the period, but still climbed about 1 percentage point to account for some 31% of MISO power generation in December.
Downward pressure on coal generation in MISO, and the broader US power generation market, comes as domestic production of the fuel stagnates and inventory levels brush up against historic lows.
Fourth quarter to date, weekly US coal production has averaged about 11.35 million short tons, according to data from the US Energy Information Administration. Following a pandemic-fueled decline to multiyear lows in 2020, US coal production remains over 2 million st, or nearly 18%, below its prior five-year average level.
In the pandemic era, a sustained drop in coal production has also pushed inventories to historic lows. As of September 30, EIA data shows US stockpiles at just 80.4 million st – a nearly 38% decline from its estimated prior-year level at 129 million st.
Lower production and inventory levels have helped to fuel a runup in Central Appalachian coal prices. In November, CAPP thermal coal prices reached a 13-year high at $100/st. In December an uptick in supply has subsequently eased prices, which have fallen to around $94/st in recent trading, S&P Global Platts data shows.
Gas burn, prices
Through the current heating season, higher gas prices – even in the upper $3s/MMBtu – will undoubtedly remain a damper on power burn. According to recent forecasts from Platts Analytics, generator demand for gas this winter should trend comfortably below levels recorded in the prior three heating seasons.
Current forecasts, though, also reflect the emerging limits on price-induced gas-to-coal switching. Even at gas prices over $4, generators' capacity to simply switch away from the fuel has been compromised recently by the downward trend in coal production and storage levels, and by higher prices for the fuel.
Further upside for gas-fired power generation could come beyond the upcoming heating season. With a backwardated forward curve promising lower gas prices by mid-2022, the price-motivated incentives for switching away from gas could ease, especially if prices dip below $3/MMBtu. As of mid-December, the 2022 calendar-year curve is now trading at close to $3.80/MMBtu, S&P Global Platts' most recently published M2Ms forwards data shows.