Natural Gas In The Electric Power Sector: Latest Trends

Natural Gas In The Electric Power Sector: Latest Trends

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In one of my previous articles, I explained why natural gas traders should care about the latest trends in the electric power sector and what indicators they should be monitoring. In this article, I would simply like to update you on some of the latest trends.

As you know, the electric power sector is the primary consumer of natural gas in the United States. Its share in the annual natural gas demand structure is around 30%, while its share in the injection season demand is close to 50% (see the charts below).

U.S. Natural Gas Consumption Seasonality

U.S. Natural Gas Consumption Seasonality (EIA, Bluegold Trader)

U.S. Total Natural Gas Demand by End Use

U.S. Total Natural Gas Demand by End Use (EIA, Bluegold Trader)

The latest data indicates that the weight of natural gas in the electric power remains largely unchanged. The EIA’s latest Electric Power Monthly Report shows that, in December, the share of total electricity supplied by natural gas-fired power plants increased by less than one percentage point y-o-y to 37.44%. At the same time, the share of coal-fired generation has dropped by more than five percentage points to 17.63%. Indeed, in the past seven years, the share of coal-fired generation has been steadily declining. Concurrently, the share of wind and solar generation increased by more than three percentage points y-o-y to 15.68%.

U.S. Net Electricity Generation by Energy Source

U.S. Net Electricity Generation by Energy Source (EIA, Bluegold Trader)

Natural gas has long lost its standing as the fastest-growing source of electric power in the U.S. On a 12-month average basis, its share in the electric power sector has plateaued and started to decline (see the chart below). Renewable sources – particularly, wind and solar – are now growing a lot faster. In less than five months, renewables will probably be providing more electricity to U.S. consumers than coal-fired power plants.

U.S. Net Electricity Generation by Energy Source

U.S. Net Electricity Generation by Energy Source (EIA, Bluegold Trader)

Still, on a 12-month average basis, coal remains the second most important source of electricity generation in the United States, followed by nuclear and “other renewables” (wind and solar). Therefore, coal-to-gas switching continues to be an important element in my natural gas consumption models.

According to my calculations, the average NG/coal spread currently stands at around $2.55 per MMBtu, up +117.5% y-o-y and up +127.05% vs. the five-year average.

U.S. Natural Gas - Coal Spreads

U.S. Natural Gas – Coal Spreads (EIA, CME Group, Bluegold Trader)

Given that the natural gas prompt month futures contract price has increased by more than 80% y-o-y, while the average price of coal has increased by less than 70% (over the same period), NG/coal spread has widened, meaning that natural gas became less competitive (vs. coal) as a “feedstock” for electricity generation.

As of today, coal-to-gas switching remains extremely wide (by historical standards), which is having a negative impact on coal-to-gas switching. I estimate that coal-to-gas switching currently stands at around 3.0 bcf/d, some 4.1 bcf/d below the five-year average, and 4.0 bcf/d below last year’s level.

The negative impact of hydro and wind generation on natural gas consumption in the Electric Power sector has been rather strong over the past several weeks. Right now, the overall monthly net impact of all non-degree-day factors (coal-to-gas-switching, nuclear outages, hydro generation, wind generation, and solar generation) is record low – negative 3.7 bcf/d, some 4.8 bcf/d lower than a year ago (see the charts below).

The Impact of Non-Degree-Day Factors on Natural Gas Consumption in the Electric Power Sector (weekly)

The Impact of Non-Degree-Day Factors on Natural Gas Consumption in the Electric Power Sector (weekly) (EIA, Bluegold Trader)

The Impact of Non-Degree-Day Factors on Natural Gas Consumption in the Electric Power Sector (annual change)

The Impact of Non-Degree-Day Factors on Natural Gas Consumption in the Electric Power Sector (annual change) (EIA, Bluegold Trader)

Note:

  • Coal-to-gas-switching has a positive impact on natural gas consumption in the Electric Power Sector. Lower natural gas prices (relative to coal) lead to higher levels of coal-to-gas switching (and vice versa). The lower the price > the higher is the level of coal-to-gas switching > the greater is total consumption (specifically in the Electric Power sector) > the greater is the total demand > the stronger is the “bullish pressure” on the EOS storage. The economics of fuel-switching is an important element in natural gas trading but mostly during the injection season (roughly, April-September).
  • Nuclear outages have a positive impact on natural gas consumption in the Electric Power Sector because plants burning natural gas usually make up much of the missing nuclear generation, especially during periods of high demand.
  • Hydro, wind, and solar generation has a negative impact on natural gas consumption in the Electric Power sector because it generally “displaces” the burning of fossil fuels.

Power Plants

In March 2022, the total stock of natural gas-fired power plants is expected to increase by 1.62% y-o-y to 483.5 GW of net summer capacity, which will amount to 42.7% of total operating generation capacity in the United States (0.5 percentage points smaller than a year ago). Conversely, due to the ongoing retirements of old and ineffective generators, the total stock of coal-fired power plants will decrease to 207.9 GW (-2.8% y-o-y), just 18.3% of total capacity – see the chart below.

However, the positive effect on natural gas usage in the electric power sector will be entirely offset by the rising share of renewables. Indeed, wind capacity and solar capacity are expected to grow by 12% and 28% y-o-y, respectively. Therefore, the total annualized net effect* from the changes in generation capacity additions in March 2022 is estimated to be negative at around -5,563 MW of net gas-fired capacity.

U.S. Power Plants (Net Summer Capacity, % share of Total Capacity)

U.S. Power Plants (Net Summer Capacity, % share of Total Capacity) (EIA, Bluegold Trader)

*The total annualized net effect on gas usage from changes in generation capacity = natural gas additions + coal retirements – natural gas retirements – coal additions – nuclear additions – wind, hydro, and solar additions + retirements of renewables and nuclear = -5,563 MW of natural gas-fired generation in March 2022.

Renewables

The share of “other renewables” (wind and solar) is growing very fast. Together, they already have overtaken hydro and nuclear power and are likely to overtake coal in less than five months. Previously, in an attempt to estimate the impact of non-degree-day factors on the potential natural gas consumption in the electric power sector, analysts would look at the schedule of nuclear outages to try to figure out how many nuclear megawatts will be replaced by natural gas. They would also study the level of snowpack to estimate hydro inflows and eliminate it from total calculations.

Today, however, natural gas analysts also must study wind speeds and the levels of solar radiation, since the influence of “other renewables” can no longer be ignored. In this regard, please note that, out of 12 calendar months, March has historically been one of the “strongest” months for renewable power (see the full ranking in the chart below).

At this point in time, I estimate that, in March 2022, wind, hydro, and solar generation will displace some 7.2 bcf/d of potential natural gas consumption in the Electric Power sector (0.5 bcf/d more than a year ago).

U.S. Renewable Generation Seasonality

U.S. Renewable Generation Seasonality (EIA, Bluegold Trader)

Source: Energy Information Administration, Bluegold Trader estimates, and calculations

It is important to understand the key features of electricity generation from renewable sources. One of the most important features is natural seasonality. Renewable energy (in our case, wind, solar, and hydro) is derived from natural processes, which cannot be controlled by humans (for example, sunlight and wind). Only hydro generation can be partially controlled, but it’s also heavily influenced by precipitation and melting snowpack in the Pacific Northwest. In the chart above, I have ranked 12 calendar months in terms of their ability to provide “natural fuels” for renewable electricity generation. The ranking is based on an annual percentile basis and ranges from 1 to 12 for every type of renewable energy. 1 – weakest; 12 – strongest.

For example:

  • In January, there are more cloudy days than clear days, and sunny days are shorter, so solar generation is at its weakest. Therefore, I give only 1 point to solar energy in January.
  • In April, the melting snowpack is increasing water flows, and hydroelectric output is increasing. Therefore, I give 11 points to hydro energy in March.
  • In most regions, the average wind speeds slow down during the summer, and wind generation is at its weakest in August. Therefore, I give only 1 point to wind energy in August. At the same time, August tends to have fewer cloudy days and longer sunny days, so solar generation is very strong (11 points).

Total Supply-Demand Balance

On balance, when I factor in other market variables such as production, imports, exports, and weather-induced consumption by other users, I estimate that over the next three months (March-April-May), the total natural gas supply-demand balance will be looser than last year by +2.64 bcf/day (see the chart below).

  • March: +0.31 bcf/d
  • April: +3.33 bcf/d
  • May: +4.27 bcf/d

U.S. Total Natural Gas Balance

U.S. Total Natural Gas Balance (EIA, Bluegold Trader)

Originally Posted on: https://seekingalpha.com/article/4495503-natural-gas-in-the-electric-power-sector-latest-trends?source=feed_tag_commodities
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