In last week’s Energy Market Insight, BTU Analytics highlighted that early summer fundamentals point to strong US LNG demand this summer, a sharp contrast from last summer’s low exports. Unlike LNG, US power burn had a strong summer in 2020 as weak natural gas pricing pushed coal generation out of the power supply stack. Gas generation climbed to fill the shortfall and peak power burn reached over 45 Bcf/d. This year, the Henry Hub remaining summer strip is at $3.00/MMBtu, setting up power burn to have a very different summer in 2021 than in 2020. At these prices, we should see gas to coal switching in regions where coal and gas generation still battle for market share.
Since 2010, the US has retired nearly 30% of its coal capacity with coal capacity falling from 331 GW in 2010 to 235 GW in 2021. The majority of coal plants retired in the past 10 years are those that are no longer economic to run, though climate-focused legislation in some areas has also contributed to retirements. In the Pacific Northwest and New England, 65% of coal capacity has retired since 2010, and 55% of capacity has been retired in the Southwest. The map below shows remaining coal capacity by region. The Midwest, Northeast, and Southeast have the most coal capacity still operating.
Relatively weak summer natural gas pricing in the past couple years means that we have most often discussed coal to gas switching in the power market as gas has pushed coal out of the power supply stack. However, with natural gas prices above $3.00/MMBtu, there is potential to see the reverse in areas with access to relatively cheap coal and significant coal capacity remaining to displace natural gas. BTU Analytics estimates natural gas prices between $3.00 – $3.49/MMBtu could result in over 2 Bcf/d of natural gas power burn could be at risk this summer. If natural gas prices climb over $4.00/MMBtu, close to 3 Bcf/d of natural gas demand could be at risk. The Midwest and Northeast lead in potential gas to coal switching at nearly 700 MMcf/d of potential gas displacement at over $3.00/MMBtu gas pricing.
These estimates are based on implied regional gas prices, not just the Henry Hub price. Basis differentials could be wide this summer, especially in the Northeast where dry gas production is already pushing up against takeaway constraints, putting downward pressure on regional pricing. While the Henry Hub summer strip is right at $3.00/MMBtu as of May 3, implied Chicago Citygate outright is averaging $2.85/MMBtu, Dom South is at $2.04/MMBtu, and Transco Zn 4 is at $2.96/MMBtu. Given BTU Analytics’ expectations for summer pricing, we estimate that closer to 1.5 Bcf/d of gas power burn is at risk this summer from gas to coal switching. With LNG fundamentals suggesting strong demand at export facilities this summer, and US gas production yet to fully recover from last year’s market shocks, lower gas power burn could help to keep the US gas market in balance this summer.