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Analysis: Coronavirus response could limit gas demand upside from fuel-switching

Highlights

Gas share of thermal load rises to 66% in March

Social distancing already cutting US commercial-sector loads

Shorter nuclear refueling plans to keep more capacity online

New York — As US natural gas prices continue to test new lows, rising power-sector demand for the fuel from coal-to-gas switching could be offset in the months ahead by anticipated demand destruction and a compressed nuclear refueling schedule – both factors linked to the growing coronavirus pandemic.

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On Thursday, cash prices at the Henry Hub lost another 11 cents, tumbling to a preliminary 21-year low settlement price at just $1.48/MMBtu. Since November, the benchmark US gas index has given up more than $1.35, or nearly 48%, S&P Global Platts data shows.

Over the same five-month period, coal-vs-gas $/MWh fuel cost ratios have moved aggressively in favor of gas in nearly all of the competitive independent system operator territories, including SPP South, Into Southern, PJM West and MISO Indiana.

Tumbling prices and favorable cost ratios for gas haven't gone unnoticed by power generators.

Last month, thermal load share for gas in the US power sector climbed to an estimated 66%, up from 55% as recently as November, data compiled by S&P Global Platts Analytics shows.

DEMAND DESTRUCTION

Power sector fuel-switching in response to low gas prices is nothing new.

From first to second-quarter 2016, gas prices in the mid-$1/MMBtu area saw many generators procure short-term supplies of the fuel that were sufficient to boost summer power burns to unanticipated record highs – well above levels implied by prior, permanent changes to the US generation stack.

From June to August 2016, US power burn averaged a record-high 35.1 Bcf/d, outpacing the prior-summer average by 2.8 Bcf/d, or nearly 9%, Platts Analytics data shows.

This summer, though, cost-motivated fuel-switching in the generation stack could be partially or even largely offset by demand destruction tied to ongoing social distancing efforts in the US.

As state-level shutdowns and stay-at-home orders continue to widen across the US, Platts Analytics data is already showing depressed commercial sector load from office, school and retail shutdowns in affected areas. In New York City, where the lockdown has been particularly severe, recent daily average electricity demand is now trending below the prior five-year range.

Cumulatively, Platts Analytics estimates total potential demand losses in the power, industrial and residential-commercial sectors could reach 3 Bcf/d in April and May.

NUCLEAR REFUELING

For the oversupplied US gas market, the prospect for a lifeline from the power sector has grown dimmer in recent weeks as many nuclear power facilities move to compress refueling schedules this spring, potentially keeping significant additional capacity in operation.

"Plants with upcoming refueling outages are evaluating whether some planned activities, such as certain testing and inspections, can be deferred to a future outage without an impact on plant safety," Doug True, chief nuclear officer at the Nuclear Energy Institute said this week.

Florida Power & Light, for example, will pare back the amount of work and, consequently, the length of its refueling outage at its 885-MW Turkey Point-3 plant.

At Exelon's Limerick-1, and others like it, plant operators are seeking to defer or eliminate inspections of components such as valves and welds – typically done to ensure safety compliance – in a move that could significantly trim the duration of refueling outages.

This spring, some 36 nuclear reactors with capacity totaling 38,142 MW are scheduled for refueling – the largest total in three years. In 2019, the average duration of refueling outages at US nuclear units was 36.2 days – a period that could be significantly shorter this season.