The impacts of COVID-19 and the OPEC+ price war have made their mark on oil markets, as May contracts for WTI closed on Monday at around -$38/bbl (no, that was not a typo). BTU Analytics has done extensive research over the last several weeks on the consequences of these moves in both our Upstream Outlook and in a special market update webinar, which you can view here. One of the takeaways for the gas market is that with such a shock to associated gas supply, likely both a downward demand response from Power and LNG will be needed to balance markets. This will require gas prices to rise, particularly over the summer. Previously, we’ve highlighted the US’ diminishing ability to switch from coal generation to gas generation in a previous commentary. While that would have been the case in normal times, these days are far from normal, so we now need to look into the US’ ability to move in the other direction; shifting from gas-fired generation to coal-fired.
Coal-fired generation represented just under 25% of the US fuel mix in 2019, however region by region there are large disparities in the level at which coal plants are running. The map below shows average utilization rates for summer of 2019 by each coal power plant in the US.
What can be seen here is that regions like the Rockies had coal plants that were running at very high utilization levels last summer, while other areas of the country, like the Atlantic Seaboard, had underutilized coal plants.
The above shows just how big the disparity in coal fueled power generation is between different regions, and average differences of coal utilization between these two regions are around 30-40%. So as gas prices begin to increase this year, the Atlantic Seaboard has room to grow coal-fired generation as gas-fired generation becomes less competitive. However, where coal plants are already running at high utilization, increases in gas pricing would likely result in less power burn demand destruction.
So, if gas prices were to spike, and regions like the Atlantic Seaboard were to switch from gas to coal for generation, how much gas could be at risk? The below chart shows how much gas burn would be lost due to incremental coal utilization for power generation, compared to summer 2019 levels.
If Atlantic Seaboard coal utilization numbers began to increase to the same levels as the Rockies, that represents around 1.25 Bcf/d of gas demand that coal could offset. These are not insignificant numbers to the overall US gas power demand story, and particularly to a region with power gas demand of around 3-3.5 Bcf/d.
While some of this may be offset by lockdown-induced declines to load, a combination of a warm summer and high gas prices would provide a silver lining for embattled coal-fired generators. Interested in seeing how increased coal utilization could affect gas demand in the remaining regions in the US? How about insight into how increasing renewable projects could affect gas power generation? Contact us at firstname.lastname@example.org to learn more around our upcoming power market offerings.