Listen: Hot gas summer for a hot power market

View Full Transcript

J Robinson:

Hello and welcome to the Commodities Focus podcast by S&P Global Commodity Insights, where today we will be talking about the outlook for gas and power markets for summer 2024.

I'm J Robinson, editorial lead for America's natural gas news.

Jared Anderson:

And I'm Jared Anderson, and I cover North America power, specifically focusing on New England, New York, and PJM Interconnection, which covers 13 states and Washington DC.

So we'll briefly discuss the North American Electric Reliability Corporation's 2024 summer reliability assessment to see if there are any natural gas supply constraints in areas identified as having power reliability concerns, and we'll share some pricing data and views from our S&P Global analysts.

J Robinson:

I'll be talking about some of the price risks that I see in the Transco Zone 5 market as well as the Gulf Coast market and a bit of a contrarian story out in the SoCalGas market. So I'll get into that in a minute here.

But I think really for the gas market, the most interesting story this summer is the fact that low prices, a lot lower earlier this year, and coal retirements have made for really strong power demand. So I think in June so far to date, we've seen power demand averaging about 40 Bcf/d, which for June is unheard of. Those are record highs. Last summer in June we saw about 38 Bcf/d. So demand is up quite a bit and I think that that's causing some potential for price spikes in at least several gas markets this summer. I think the most interesting one probably for the gas market is Transco Zone 5. And this is a pricing region that overlaps with PJM.

So right now in the forward market, we've seen summer prices topping out around $3.00, $3.10. But this is an area where we've seen data center demand growth about 3 to 4 GW over the past three to four years. And so that's something that I think could pose a risk. Is there anything you're seeing, Jared, in the PJM Transco Zone 5 market that you think might be interesting for our listeners?

Jared Anderson:

Yeah, well certainly that data center demand growth that you mentioned has been a very hot topic. Virginia is the data center capital of the world, and there's quite a bit of going on there. So PJM's been raising the alarm bell a little bit with regard to power demand from that as well as electrification efforts and electric vehicles, a lot of which being driven by federal and state policies.

But just to turn things to this report that the North American Electric Reliability Corporation puts out, they look at summer reliability and they were saying that if there are wide-ranging heat events that affect power generation, wind power output or transmission systems coupled with demand growth like the data centers that we were just talking about, that could contribute to resource adequacy risks with a large portion of North America at risk of power supply shortfalls for the summer. While other areas showed reduced risk due to resource additions.

J Robinson:

That's interesting that you bring that up because generally in the summertime we see flows into Transco Zone 5, which would be the southern region of PJM and a little bit further south as well. Transco Zone 5, we see natural gas flows spike in there and I know that there's limited capacity there. Do you think that natural gas could come up short this summer? I mean, we have seen prices in Transco Zone 5 hit pretty extraordinary highs between $5 and $10 in recent summers. So I'm wondering what's the biggest risk that you see in PJM in that Transco Zone 5 area?

Jared Anderson:

Yeah, it would certainly be gas supply constraints potentially and issues potentially with oil supplies running low as well. A lot of generators will have dual fuel capabilities, so they will run gas and also have oil as a backup, but when we get extended heatwaves, sometimes those oil supplies can run down. But according to NERC's reports, PJM has adequate reserve margins, those being the volume of power supply above expected demand. So the reserve margin is at 27.6% for the summer, which is fairly healthy, and they did not have PJM as an elevated risk category. So from that perspective, I think things are looking okay. However, we are in the midst of a heat wave, we've had a heat wave going on recently and that has led to price spikes for sure.

J Robinson:

Yeah, I think a good thing to remember actually is that these data centers have cooling requirements of their own. So during the summertime when we see temperatures around mid-90s, 100 degrees, a lot of these data centers are needing to keep their machines at quite a significantly lower temperature. So that's really going to be fueling that extra cooling demand from these data centers in addition to the power that they normally pull. So while the forward market is pricing in $3 gas for Transco Zone 5, I think there's always that risk that we could see maybe constraints on flows into Zone 5 or just overwhelming demand where we see prices spike way above $3. In recent years, we've seen them over $4, and in 2022, obviously when Henry Hub was around $8 or $9, we saw prices in Transco Zone 5 go as high as $15 or $16. So I think that's an area to watch out for.

Jared Anderson:

Yeah, those are some high prices.

J Robinson:

Absolutely. And on the other side of that, east of Henry Hub, which is actually along the Gulf Coast, this is also an area that feeds into Transco Zone 5. So there's gas that moves north out of Transco Zone 4 and gas that moves south out of Transco Zone 6 into Zone 5. And so east of Henry Hub is another really interesting one. So the region I'm talking about is Transco Zone 3, Transco Zone 4, and Florida Gas Zone 3. That area is really interesting because prices have really spiked in recent summers, and a big driver of that is competing demand between power and LNG. So because we've got all of those LNG terminals on the Louisiana Gulf Coast, I think that it's harder to move gas east of that area. And so there's a lot of competition. And then there's also maintenance that goes on there. We saw earlier this year, I don't know if there was an impact in the power markets, but the Transco Compressor Station 60, there was some maintenance going on there, and we saw actually Florida Gas and Transco Zone 3 prices really rise sharply earlier this year.

Jared Anderson:

Yeah, I haven't focused too closely on that region, but I do think that the competition with LNG demand and power burn for the summer is something to pay attention to for sure.

Just quickly looking back at PJM, S&P Global Commodity Insights analysts forecast a price of $42.30/MWh for the rest of this year, and that's compared to a 2023 average of $39.16/MWh. But during this recent heat spot prices, so day ahead on peak prices reached as high as $72/MWh. So you can see how the heat has been playing a role in driving up prices there.

J Robinson:

That's interesting. Another thing that I think we wanted to talk about was the West Coast markets, the SoCalGas utilities footprint has always been an interesting one. What are you hearing about what's going on out there in the power markets this summer?

Jared Anderson:

Yeah, so again, our analysts have forecast for the rest of this year a price of $40.41/MWh, and that compares to a 2023 average of $60.44/MWh. So down from the highs of last year. And I believe you were mentioning some ample storage at Aliso Canyon playing a role.

J Robinson:

Last year, the CPUC decided to again expand capacity to Aliso Canyon, and as you know, that's a pretty controversial facility where in 2015 there was a methane leak there and California and the Public Utilities Commission out there has been very careful about making sure that Aliso Canyon is reliable, that it's not leaking natural gas. So they've been very slow to expand the capacity there. But at the end of last summer, they expanded the capacity. And so the overall capacity for the SoCalGas utility is now over 100 Bcf, which doesn't sound like a lot, but for Southern California, that's a pretty hefty amount of storage. And so that actually is the highest it's been since 2015. And storage right now in Southern California is trending above 100 Bcf. Wow. It's pretty high. Right. And we've seen June to date prices at the, SoCalGas City Gate trending at $1.70. And earlier this spring actually, we saw record lows at the SoCalGas City Gate under a dollar.

Now mind you, this is a location where gas prices during the summertime typically trade between $5 and $10 and have spiked as high as $10 to $15 in the middle of summer. So it's a bit of a contrarian story. Now, the gas market is expecting to see, in the forward market at least, they're expecting to see prices average around $3 to $3.50 in the Southern California Gas market. But I think this is also probably an area that could be a risk with storage. As high as it is, it seems like probably things are going to stay under control. Prices are going to probably be at record lows this summer, but I think there's always that risk. I know water supply into California is potentially an issue. Have you looked at anything related to that?

Jared Anderson:

Yeah, there was, earlier in the season, the Northwest River Forecast Center said that it expects big deficits in May, June and July until some baseload conditions are reached. So that is a important factor to watch. And yes, the Civic Northwest Hydropower supplies are definitely a factor because that power gets shared down into California and when we've had drought conditions, it's played a pretty significant role in price volatility in some of the regions that we were just talking about in California.

J Robinson:

Yeah, California is always an interesting market to watch out for. I think this year I think the residents out there could get a break. They've been complaining about their utility bills for the last four or five summers, so maybe they'll get a break this year.

But I think that's probably going to about do it on time. We don't want to run too long here. So I want to just thank you for joining me, Jared, and anything else?

Jared Anderson:

Yeah, we do have our Financing US Power Conference, and that's going to be held in October from the 23rd to the 25th. It'll be at the Marriott Marquis in Houston. And there are some early bird rates that you can take advantage of. So if you register by August 23rd, there are some savings associated with that. So we'll have some of our local Houston reporters on the ground there at the conference and hope to see some of you there.

J Robinson:

Some savings to be had, go for that early registration, right? And I want to thank our listeners for tuning in. If you like this episode, please be sure and leave a rating or a review on your favorite podcast player. This has been a Commodities Focus episode, and it was produced by Jennifer Pedrick in Houston.