Higher natural gas prices are expected this winter and that should result in a reduction in coal-to-gas fuel switching within the electric power sector, according to a report published by the Natural Gas Supply Association (NGSA).
Virginia-based Energy Ventures Analysis (EVA) did the annual winter outlook assessment of the wholesale natural gas market, which was released Oct. 5. The report points out that various weather forecasts predict a significantly colder winter. It also cites an increase in demand for gas by the weather sensitive residential and commercial sectors.
The forthcoming winter is projected by the National Oceanic and Atmospheric Administration (NOAA) to be about 12% colder than last winter, EVA notes in the report. Nevertheless, the forthcoming winter is projected to be a relatively mild one in that it is forecasted to be about 3% warmer than the 30-year average, EVA said.
Based upon recent NYMEX future prices, which remain volatile, natural gas prices for the forthcoming winter are expected to be over 50% higher than gas prices for the prior winter.
“This change in gas prices will result in a significant reduction in coal-to-gas fuel switching, which, in turn, will cause electric sector gas demand for the winter to decline,” EVA said in the report for the NGSA.
“Partially offsetting this phenomenon are structural changes within the electric sector, such as the continuing retirements of coal-fired capacity.” This net result is that electric sector gas demand this winter is expected to decline 3.3 BCFD (billion cubic feet daily), or about 13%, EVA said in the report.
Primarily because of the mild weather last winter and resulting gas prices, fuel switching last winter was at an all-time record for the winter season. “However, with the anticipated increase in gas prices for the forthcoming winter, which is in part due to the anticipated colder weather, fuel switching is expected to be substantially lower (i.e., in round terms about 50% lower),” EVA said in the report.
The general trend for electric sales for both 2015 and 2016 has been flat to declining (meaning 0.3% growth in 2015 and a 2.2% decline year-to-date for 2016). One factor behind this decline in on-the-grid electricity sales is the continuing growth in distributive generation, the firm noted in the report.
“Finally, while it is unlikely that the addition of new gas-fired capacity will have a significant impact on this winter’s electric sector gas demand, trends in new gas-fired additions are meaningful for assessing the intermediate-term outlook for gas demand within this sector and thus, provide an additional point of perspective,” EVA said in the report.
As illustrated, on a net basis, coal-fired capacity has declined about 38 GW over the last several years, while combined cycle (CCGT) gas-fired capacity has increased about 22 GW, the firm said in the report.
“Going forward it is anticipated this trend will continue, as during 2016 and 2017 another 20.2 GW of coal-fired capacity is expected to retire on a net basis, while new build CCGT units will total about 17.8 GW,” Energy Ventures said.