ANALYSIS: AECO hub boasts strongest winter prices in years, gas' power share stands firm

Denver — Despite AECO gas hub showing its highest cash price value in years this winter, gas-to-coal switching has so far failed to materialize in the region, meaning demand could increase this coming winter despite higher natural gas prices.

AECO cash prices are expected to be well in excess of $2/MMBtu this winter, which would be far higher than prior winters.

With AECO cash prices expected to be the highest they have been in years this winter, gas-fired plants could ramp down their utilization as coal becomes the more economical generation choice. AECO futures for the balance of the winter 2020-2021 strip were most recently trading around $2.35/MMBtu. This was about 60 cents stronger than the past three winters, raising the possibility that the market could experience gas to-coal switching.

However, data since August indicated that even at these higher prices, there is little risk of significant gas demand loss from the power sector, according to S&P Global Platts Analytics. Gas has fluctuated between 60% and 70% of Alberta Electric System Operator's thermal loads since August, which could drive a difference of almost 200 MMcf/d of demand this winter. The thermal load is calculated as gas generation divided by coal generation plus gas generation.

Data suggested generators were showing little sensitivity to higher AECO prices.

Gas has accounted for 60% to 70% of AESO thermal loads since August. The difference between 60% and 70% of the total power generated in winter 2019-20, assuming a heat rate of 8 MMBtu/average MW, is about 180 MMcf/d of gas demand, according to Platts Analytics.

Data from the past several months showed little sensitivity to gas prices as it relates to its share of thermal loads in AESO. Various price points have not shown a clear trend toward lower gas generation as AECO strengthens.

When AECO ranged between 90 cents/MMBtu and $1.62/MMBtu, gas averaged 66% of thermal loads for AESO, according to historical data. When the hub featured cash prices of $2.10/MMBtu to $2.57/MMBtu, gas' percent of thermal loads only fell to average 63%. When prices ranged from $1.92/MMBtu to $2.09/MMBtu, gas' thermal loads averaged the highest, capturing 67% of AESO generation. This indicated there is no clear sign AECO's expected strength this winter would put dampen gas-fired power demand.

Also, West Canada exports to the US Midwest are likely to strengthen the week starting Nov. 23 as stronger demand widens the Chicago-to-AECO spread. West Canada flows to the US Upper Midwest dipped by 503 MMcf/d from Nov. 18 to 19 as West Canada demand rose 513 MMcf/d, according to Platts Analytics. While this would be enough to weaken flows to the Midwest, demand in the Pacific Northwest also jumped, pulling 3.3 Bcf/d of West Canada's gas exports.

NICOR's premium to AECO subsequently fell 20 cents/MMBtu to 4 cents/MMBtu. Northern Border Pipeline took the brunt of this, falling 404 MMcf/d day over day. Platts Analytics expects the weakness to dissipate in the current week as US Midwest demand rises 543 MMcf/d. This should strengthen Chicago once again and widen Chicago's premium to AECO. Exports from Alberta to the US Upper Midwest are likely to strengthen.