New York — As cash prices at the Henry Hub zoomed past $3 this week, an ongoing wave of fuel switching is promising to significantly reduce gas demand from power generators this winter.
On Oct. 26, benchmark Henry Hub gas climbed to a 19-month high at $3.08/MMBtu as a blast of winter-like temperatures swept the Rockies and the Midwest fueling a surge heating demand. On Oct. 27, cash prices at the Louisiana hub were down just 4 cents to $3.04/MMBtu, preliminary settlement data from S&P Global Platts showed.
The recent uptick in gas prices is making coal generation cheaper in several independent system operator territories including ERCOT and North SPP South, prompting some power generators to shift away from gas in favor of coal, S&P Global Platts data shows.
One of the largest shifts in market share from gas to coal has come in ERCOT. Month to date, thermal share for gas is averaging about 46%, down from nearly 51% in September. Over the same eight-week period, market share for coal has climbed about 2 percentage points to over 27% in October.
In the Southwest Power Pool, stronger wind generation in October appears to be crowding out both gas and coal this month with market share for both fuels falling about 2 percentage points and 5 percentage points, respectively, compared to September.
With Henry Hub gas prices already at over $3 this month, mounting concerns over low US production levels and potential supply-deliverability constraints this winter are fueling a bullish run in the forward market. On Oct. 26, calendar-month prices for the December, January and February contracts settled at $3.25, $3.37 and $3.33/MMBtu, respectively, S&P Global Platts' most recent M2MS data shows.
During those same peak-winter months, weather-driven demand and price volatility could see single-day cash prices climb significantly higher – particularly at hubs in the US Northeast where winter prices often climb into the $5 to $6/MMBtu range. During a record-setting cold spell in January 2018, even benchmark Henry Hub prices climbed to over $7, up from a winter-season average at under $3/MMBtu.
As risk-averse power generators respond to this winter's potential volatile market conditions by switching away from gas, Platts Analytics is anticipating a steep drop in generator demand compared to last winter. From November 2020 to March 2021, power burn is forecast to average about 25.3 Bcf/d this season – down more than 3.5 Bcf/d, or 12%, compared to winter 2019-2020.
Last winter, Henry Hub gas prices averaged just $2.10/MMBtu from November to March, fueling record winter-season demand from power generators, despite historically mild weather during the typically peak-demand months of December and January.