Low natural gas prices across the U.S. are putting additional pressure on coal demand, as natural gas becomes more economic during the COVID-19 pandemic and related oil crisis. In the S&P Global Market Intelligence first-quarter Power Forecast, fuel prices reflect the impacts of the oil war, with OTC Global Holdings gas forwards dropping more than 50% from December 2019 prices to April 2020, followed by a full rebound in 2021. Market Intelligence further simulated the impact of load reductions attributable to COVID-19, modeling a decrease in demand of 10% over all domestic U.S. markets except Electric Reliability Council Of Texas Inc. This scenario allows an estimate of the impact on gas and coal demand, in addition to the observed impact from lower gas prices.
Natural gas spot and forward prices have been falling steadily since well before the COVID-19 pandemic, as a result of a warmer-than-normal winter and excess supply in global oil markets. Both of these trends accelerated at the start of 2020.
The result of cheaper gas is a spike in gas-fired generation in all regions, but particularly in ISOs like the PJM Interconnection and the Midcontinent ISO, or MISO, where gas capacity and production is largest. Annual average capacity factors of combined cycle plants are typically stable around 55% in PJM and MISO, but with the decrease in natural gas prices, Market Intelligence forecasts capacity factors to spike in 2020 up to 71% and 65%, respectively. PJM experiences the largest increase due to its large share of gas-fired generation and proximity to major gas hubs.
Forecast gains in gas-fired generation come at the expense of coal generation. Capacity factors of coal-fired generation decrease in response to the drop in gas prices. Coal plants in MISO and Western Electricity Coordinating Council. had capacity factors in 2018 of 58% and 63%, respectively, but Market Intelligence forecasts capacity factors to fall to 40% and 39% in 2020 due to low gas prices. SPP and PJM, with generally less coal-fired generation, see capacity factors fall to 44% and 36%, respectively, due solely to the decreased price of natural gas.
Accounting for decreased electricity demand that accompanies the fuel price decline during the COVID-19 pandemic, Market Intelligence projects that gas generation will grow less, and that coal generation will decline further still. In all regions except PJM and MISO, the expected increase in gas-fired generation is fully offset by the decrease in demand. In PJM and MISO, the impacts of low fuel prices are dampened, with only 9% and 2% increases in 2020 annual capacity factor compared to 16% and 9% increases in the first-quarter forecast. The COVID-19 demand scenario resulted in 16 TWh, or 27%, less gas-fired generation in PJM in 2020.
Coal generation takes the largest hit, impacted both by low natural gas prices and decreased demand. Less demand further accentuates the decline in coal capacity factors, resulting in capacity factors being cut in half in some regions. In the Western Electricity Coordinating Council, capacity factors fall from 63% in 2018 to 31% in 2020 in the COVID-19 demand scenario. In PJM, coal is predicted to drop an additional 10% from the first-quarter forecast, to a 26% capacity factor.
While gas prices are currently forecast to return by 2021, the future of electricity demand is still unpredictable. Hear from our experts on the impact of COVID-19 on the U.S. merchant power sector and renewable energy. Register here >
To see wholesale price, supply and demand projections, see the S&P Global Market Intelligence Power Forecast.