Over the past 15 years, natural gas-fired power generation has been bolstered by the introduction of a low-cost supply of natural gas brought on by the shale revolution. Lower-cost fuel made gas plants increasingly economic, allowing them to capture market share from coal-fired generation. However, the dynamics that drove these once-consistent gains have changed. Increases in natural gas power burn are no longer as highly correlated to wholesale market competitiveness. Instead, further increases are ever more reliant on coal plant retirements brought on by factors such as emissions control costs and ESG/decarbonization targets. Today’s Energy Market Insight is an excerpt from a story that was recently published in BTU Analytics’ Gas Basis Outlook, which you can request a sample of by emailing firstname.lastname@example.org.
The historical relationship between natural gas and coal-fired generation in the United States is illustrated in the following graphic.
In general, the coal plants that have retired over the past 15 years were those that faced the strongest competitive pressures from natural gas generation. These plants are considered elastic, meaning that their generation was highly affected by coal’s price competitiveness with respect to natural gas. As these elastic plants felt economic pressure and were retired, the US’ coal fleet as a whole became more inelastic, meaning their generation was less affected by swings in the competitiveness between coal and natural gas pricing.
An illustration of elasticity at a plant level can be seen below. Negative prices mean coal pricing was more economic, and positive means gas pricing was more economic.
Despite diminishing competitive pressures from gas generation and pricing, more than 65% of operating coal capacity in Northern MISO has an announced retirement. However, contrary to the historical pattern of coal retirements being driven by the economics of natural gas, coal plant retirements in Northern MISO are increasingly driven by economic pressure in the forms of capital expenditures required to ensure that plants meet environmental regulations and social pressure on utilities to decarbonize their generation mix.
Many utilities have announced their intent to backfill lost coal generation with incremental wind and solar buildout. However, given the intermittent nature of renewable generation, it will be hard to fully replace lost coal generation with wind and solar without significant buildout of energy storage, an area in which MISO lags significantly. For that reason, it is likely that lost baseload coal generation will be backfilled, at least in the near- and medium-term, with gas-fired generation.
Investment in newer, more efficient gas-fired power plants helps to explain the decline in average heat rates across the country. A gas plant with a heat rate of 7 MMBtu/MWh will use materially less gas than a plant with a heat rate of 10 MMBtu/MWh, so understanding the characteristics of the gas fleet is necessary to determine how much gas will be consumed. As the graphic below shows, in Northern MISO, newer, more efficient gas plants tend to be used more frequently than older, less efficient plants. Not only are these new gas plants more efficient, but their efficiency drives lower variable costs, which allows them to dispatch at higher levels.
A review of plant utilizations indicates additional generation capacity is available to serve load when coal units retire. But how is natural gas power burn expected to change given the backdrop of an increasing renewables buildout? For an in-depth analysis of expected incremental natural gas demand in Northern MISO, and more analysis on natural gas pricing, production, and infrastructure, request a sample of our recently published Gas Basis Outlook by emailing email@example.com.