ANALYSIS: Texas generators dial up gas demand amid summer weather, low prices

New York — Gas-fired power burn in Texas is trending at a pre-summer record high this week as ERCOT generators dial up the fuel's market share amid scorching temperatures, flagging wind output and low prices.

On June 5, Texas burns were estimated at over 6.2 Bcf/d – their highest ever for early June. At over 58% of ERCOT generation, the market share for gas is also at its highest in over nine months, data compiled by S&P Global Platts Analytics shows.

Population-weighted temperatures in Texas jumped to 85 degrees Fahrenheit on June 5, and are now forecast to remain in the mid-80s over the next two weeks as summer gets an early start in the Lone Star state. Over the weekend and into the second week of June, high temperatures in Texas' largest cities, Houston and Dallas, are forecast to hit the mid- to upper-90s.

As cooling demand climbs, wind-generation in Texas has lagged recently. Over the past week, wind share of total generation has fallen to an average 15% in ERCOT, down from a mid-20% share in late May.

Historically low prices at downstream hubs across the state are making gas the fuel of choice for generators looking to compensate for lower wind output. At Katy and Houston Ship Channel, prices in the mid-$1.60s/MMBtu this month remain at their lowest dating back to first-quarter 2016, S&P Global Platts data shows.

As new monthly contract prices come into effect, gas is also taking market share from coal. On June 5, coal generation tumbled to less than 20% of the Texas stack. In June, the generation share for coal has fallen to average 24%, down from nearly 30% last month, according to Platts Analytics data.

DEMAND RECOVERY, OUTLOOK

In May, gas demand from Texas power generators lagged its historical average as pandemic-related shutdowns and social distancing efforts limited the typical seasonal growth in electricity load.

During the month, power burn averaged just over 4 Bcf/d, down from nearly 4.8 Bcf/d in May 2019, despite recent changes to the generation stack that continue to support market share for gas. Comparatively lower burns last month also accompanied population-weighted temperatures that were actually one half-degree Fahrenheit warmer this year compared to last.

According to a recent forecast from Platts Analytics, Texas burns should remain around 6.1 Bcf/d this month as the state's economy continues to open, boosting gas and power demand to more typical summer-like averages. In June 2019, Texas power burn averaged 5.9 Bcf/d.

With associated output from the Permian Basin expected to show minimal growth this year following recent production curtailments and drilling cuts, though, tightening supply and a looming rise in Texas gas prices could see power burns retreat again as generators begin switching away from the fuel in favor of coal.

At Houston Ship Channel and Katy, forwards markets are now pricing the fourth-quarter calendar months at nearly $2.40/MMBtu. Over the same three-month period, Platts Analytics is forecasting Texas power burn to average 3.9 Bcf/d, down from an average 4 Bcf/d in fourth-quarter 2019.