ANALYSIS: Gas-fired power burn intensity surges as fuel-switching capacity wanes

As temperatures across the US hit seasonal highs, the per-degree intensity of gas-fired power burns has accelerated this summer, even in the face of $4/MMBtu gas, signaling the possibility that generators could be approaching the limit to available fuel-switching capacity at current prices.

Month to date, the US population-weighted temperature has averaged about 77.2 degrees Fahrenheit.

Despite record temperatures across much of the West this summer, the most densely populated cities have actually experienced cooler weather this month, compared to July 2020, when the population-adjusted temperature reached a sweltering 79.4 degrees F, data from S&P Global Platts Analytics shows.

Not surprisingly, generator demand for gas has been lower this July, compared to last. Month to date, power burn has averaged about 39.2 Bcf/d – down more than 11% from last July's 44.1 Bcf/d average.

At any given temperature, though, power burn demand appears to be only slightly lower this summer compared to last – surprising given that benchmark Henry Hub gas is up more than $2 since last July.

At 77 degrees F for instance, available sample data shows corresponding power burn demand averaging about 28 Bcf/d this summer. Last summer, the same 77 degree temperature was correlated with a sample average at about 28.5 Bcf/d, Platts Analytics data shows.

While higher gas prices have undoubtedly diminished power burn demand this summer, historically the effect of higher gas prices on sample burns, has been much larger.

Fuel switching

Earlier this year – particularly during the colder months – gas prices were only up about $1/MMBtu, compared to 2020 averages. Yet, at 45 degrees F for instance, sample power burn averaged about 2.2 Bcf/d lower this winter compared to sample burns in winter 2020.

While there's likely no single, straightforward explanation for the narrowing spread from winter to summer, its possible that higher overall electric demand during the summer months has made available resources more scarce – limiting generators' capacity to simply switch away from gas in response to high prices.

Recent coal plant retirements could also be playing a role in generators' diminished switching capacity.

In just the past two months, power generators have retired over 1.7 GW of coal-fired capacity. Since summer 2020, nearly 7.4 GW of coal-fired capacity has been retired, Platts Analytics data shows.

With fewer coal plants available for switching, gas burn are increasingly becoming more inelastic to price.

Outlook

In late June and again this week, gas-fired power burns have hit summer-season highs in the mid-43 to mid-44 Bcf/d range, but have fallen short of last summer's record highs around 46 to 48 Bcf/d.

For the month of August, though, the US National Weather Service has predicted above-average temperatures across most the Lower-48 states, signaling the possibility that US population-weighted temperatures could climb to levels seen last summer at over 80 degrees F.

While higher gas prices this summer are likely to continue dampening power burn demand through August, particularly hot weather could see burns surpass 45 Bcf/d, approaching record highs recorded last summer.