Winter was not kind to the U.S. gas market this year. Over the last five months, Henry Hub has fallen over 56% and the Summer 2023 strip has dropped by 47% driven by mild winter weather, not to mention a record-setting injection in January. With cash prices dipping below $2/MMBtu in late March, attention has now turned towards strong summer power demand as a potential uplift for U.S. gas prices in the coming months. However, the previous winter still has more to give. Above-average snowpack has hydro generation poised for a resurgence after years of drought, and even with sub-$2 Henry Hub pricing, the low cost of hydro would be certain to cause some displacement of natural gas-fired generation and potentially relieve beleaguered Western basis markets this summer.
BTU Analytics last looked at hydro generation in September 2022, when diminishing water levels in key reservoirs were threatening the long-term sustainability of Western hydro. However, this winter represents a swift reversal in fortunes for Western hydro. In the most recent U.S. Bureau of Reclamation (USBR) forecast for the Lower Colorado Basin, projected generation from the Glen Canyon Dam and the Hoover Dam returns to 2021 levels, reversing three straight years of declining hydro generation. The March 2023 USBR forecast shows a 24% increase over the September 2022 forecast for May–August 2023, which equates to over 4 GWh/d of additional hydro generation that could displace existing natural gas-fired generation in the Western power market.
By themselves, the Glen Canyon and Hoover dams do little to move the overall Western gas market. At an assumed heat rate of 7,200 Btu/kWh, the increased generation across both dams is just 29 MMcf/d of incremental gas-equivalent generation. However, Glen Canyon and Hoover collectively represented just 3.6% of total hydro generation in the Western U.S. in 2022. With nearly 434 GWh/d of hydro generation in 2022, approximately 750 MMcf/d of gas generation could be displaced if all Western dams see uplift similar to the Glen Canyon and Hoover dams.
While it’s unreasonable to expect all dams to see the same reversal, elevated snowpack levels across the West should result in meaningful year-over-year increases in hydro generation, although the impacts could be localized. Conversely, Washington state accounted for over 50% of total U.S. hydro generation in 2022 but has the smallest percentage increase in snowpack. One state that stands out is California, with snowpack levels 356% higher than last year and hosting 11% of total U.S. hydro generation in 2022.
The Golden State has been plagued by strong gas prices all winter, with basis at PG&E Citygate reaching as high as $51/MMBtu. While spring normally brings relief, basis is still averaging $4.86/MMBtu through the first week of April. Despite the increasing prevalence of natural gas generation in CAISO, hydro continues to play a meaningful role in the California power market. Last spring, hydro generation met up to 14% of peak load in CAISO despite significantly reduced hydro resources. If current snowpack is any indication, Western basis markets, particularly those in California, could see substantial pricing relief this spring once hydro generation materializes. For more of BTU Analytics’ analysis on the role of hydro generation in the U.S. gas and power markets, request information on our monthly US Power Brief and Henry Hub Outlook products.