The continued retirement of coal-fired power across the US in 2022 is promising to make generators more reliant on natural gas this winter. As fuel-switching capacity in the US power market dwindles, increasingly price-inelastic demand for gas could add more fuel to the rally in gas prices this winter.
In 2022, US power generators have already shuttered nearly 10.3 GW of coal-fired generating capacity. Before the end of this year, another 3.3 GW of coal capacity is also scheduled for retirement.
The Midcontinent Independent System Operator leads the US in coal retirements so far this year, shuttering nearly 4.5 GW of capacity through October. PJM Interconnection is a close second, closing just over 4 GW of coal capacity. Retirements in FRCC, SERC and the Desert Southwest combined total nearly 1.8 GW so far this year, data from S&P Global Commodity Insights shows.
This summer, coal capacity retirements made over the past year helped to fuel a record-high season for power burn demand. From June to August, US generators burned a record-high 42.6 Bcf/d outpacing, last summer’s average by 3.7 Bcf, or nearly 10%. Despite record-high prices for Henry Hub gas this summer, power burn demand also exceeded the prior summer record set in 2020 when gas prices below $2 prompted many generators to switch away from coal-fired to gas-fired generation.
As US coal retirements continue, fuel switching among thermal power sources is no longer an option for many generators, making much of the US power market a price-taker for gas. For that reason, this winter could be another record one for power burn demand – regardless of how high gas prices go.
Outlook
During this winter’s peak heating-demand months from December 2022 to February 2023, US power burn is forecast to outpace the record 2019-2020 winter season when low gas prices lifted generator demand to an average 29.9 Bcf/d over the same three-month period, data from S&P Global shows.
The record forecast for power demand this winter comes despite high gas prices. From December to February, forward gas markets are pricing the US benchmark Henry Hub at an average $6.97/MMBtu – the highest winter forward price in over a decade. Despite that, and thanks to continued US coal plant retirements, most generators will likely have little choice but to use gas as their baseload, peaking and/or intermittent thermal fuel source.
The record-high power burn forecast from S&P Global Commodity Insights, however, is calculated based on weather-normal demand. While a milder winter could weaken the power burn outcomes this season, colder-than-average temperatures could also mean generator demand outperforms the forecast.
Source: Platts