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Gas share in MISO power generation stack defies gravity of high prices

Highlights

Market share for gas up 9 percentage points from February

830 MW of coal-fired power retired since December 2020

Winter 2021-22 outlook for MISO bearish on coal and gas

Coal retirements in the Midwest Independent System Operator are giving natural gas-fired power surprisingly large market share in the ISO territory this summer, despite historically elevated gas prices.

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So far in July, gas has accounted for about 31% of total power generation in MISO, up from an annual low at just 20% market share in late February.

Growing market share for gas in MISO this year has accompanied steadily rising prices for the fuel and doesn't appear to be correlated with any established seasonal pattern in market share for gas.

At the Chicago city-gates, cash prices have averaged about $3.49/MMBtu this month – up from levels around $2.50 in late February. At the Mich Con city-gate, another key Midwest hub, prices have followed a similar trajectory, gaining nearly $1 over the past five months to average $3.47/MMBtu this July, S&P Global Platts data shows.

Historically, rising gas prices have incentivized increased dispatch of coal-fired power. Thanks to recent coal retirements, though, generator demand for gas in MISO has become increasingly price inelastic.

Since December 2020, at least seven coal plants in the ISO's territory have been retired including Dallman units 1 and 2, Hoot Lake units 2 and 3, R. Gallagher units 2 and 4 and Petersburg Station 1. The closures have subsequently removed some 830 MW of coal-fired power from the generation stack, according to data compiled by S&P Global Platts Analytics.

Market share, power burn

Despite the recent plant retirements, coal remains the fuel of choice for most Midwest generators this summer. In July, coal has generated an average 838 GWh in MISO, and accounted for about 45% market share. In comparison, month-to-date gas generation has averaged just 578 GWh, equivalent to about 31% market share, ISO data shows.

Compared to July 2020, total generation in MISO is down, thanks mainly to cooler Midwest temperatures this month.

Reduced electric cooling demand and comparatively low coal prices have undoubtedly weakened overall gas burns which are down nearly 1.5 Bcf/d compared with year-ago levels. Historical data from Platts Analytics and the ISO suggest that power burns in MISO would likely have suffered an even steeper year-on-year decline were it not for recent coal plant retirements.

Outlook

Turning toward the upcoming winter months, an additional three coal plants in the MISO footprint are currently slotted for retirement in December and January, totaling a further loss of approximately 900 MW of coal-fired power capacity.

Platts Analytics projects that average monthly coal-fired generation will be around 740 MW lower this winter (November 2021 - April 2022) than last at 25,079 MW.

Despite the coal retirements, Platts Analytics projects that gas-fired power in the MISO area will have its lowest winter generation levels since 2017-2018 at 15,299 MW.

Higher wind generation could be weighing on the Midwest winter gas outlook, with approximately 3 GW of wind generation currently in the MISO Generator Interconnection Queue that have an expected in-service date by the end of 2021. Platts Analytics expects monthly average wind generation to average 11,335 MW for winter 2021-2022, up from 9,580 MW in 2020-2021.

Strong gas forwards could also be part of the lower MISO gas generation forecast, with wind generation's lower marginal run cost providing a competitive advantage against more expensive gas inputs.

Chicago city-gate's winter strip (November 2021- April 2022) has steadily climbed closer to $4/MMBtu, reaching $3.87/MMBtu by July 19, according to Platts Analytics M2MS forward curve data.