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After two record years in 2019 and 2020, US lower-48 gas-fired
power generation is expected to retreat in 2021 owing to higher
natural gas prices and changes to the electric fleet. Many of the
trends taking place within the US generation stack are a
continuance of activity from prior years, like coal plant
retirements and capacity additions for solar- and wind-powered
projects, but the latter is picking up the pace.
For 2021, one market disrupter to note will come from
economic-driven gas-to-coal switching within the electric
generation stack. Henry Hub spot market prices are forecast to
average around $3.00/MMBtu in 2021, an annual increase of more than
50% from 2020's average.
Another key development is the scheduled retirement of 9.3 GW of
generation capacity in 2021, including nuclear, and the addition of
43.2 GW, mostly from solar and wind. The net capacity addition of
33.9 GW in the US Lower 48 will be the largest annual increase on
record.
The net expected effect on gas-fired power generation is a 6%
year-on-year decline within the electric generation stack. This
result equates to an estimated 1.2 Bcf/d, or a 4% downshift in US
lower-48 power sector gas demand in 2021.
During 2020, the COVID-19 pandemic negatively impacted domestic
natural gas demand and prices. Henry Hub prices averaged an
annualized record low of $1.99/MMBtu in 2020, which put natural gas
firmly in the money over coal across all power regions, absent
other constraints or considerations. Gas demand for power
generation hit a new annual record last year, gaining 0.7 Bcf/d on
the year to reach an average of 31.6 Bcf/d and represented
approximately 39% of the electric generation mix.
In general, if Henry Hub gas prices are $2.25/MMBtu or higher,
then in some power markets coal begins to displace gas on the
economic dispatch curve. Gas prices above $2.50/MMBtu, as we expect
for 2021, tend to favor gas-to-coal switching for all types of coal
across most power markets. The volumetric potential of gas-to-coal
and coal-to-gas switching is less than it was in years past owing
to the volume of coal plant retirements and the installation of
highly efficient gas-fired power plants, but it is still
present.
We expect 2021 average natural gas prices to average near
$3.00/MMBtu and as a result natural gas-fired power generation will
decline to 33% of US net generation. Increased generation from
coal, solar, and wind should make up the shortfall. There are
multiple market forces at play that are causing the rise in gas
prices, namely a tightening of the market due to declining
production and a slight increase in total demand.
The regional implications of higher natural gas prices in 2021
and power market capacity changes vary. Most regions in the United
States are expected to have decreased gas burn this year, some more
than others. We expect gas-fired power generation in Texas to be
the most negatively affected, declining 10%, owing to robust solar
and wind capacity additions coupled with the favorable gas-to-coal
switching economics. Conversely, we expect power burn to increase
by 14% in New York/New Jersey. This region is scheduled to retire a
highly utilized nuclear power plant in April, while also adding
capacity from solar, wind and battery storage this year. Solar,
wind and battery generation operate at lower utilization rates,
however, creating an opportunity for natural gas to fill the
consumption gap left by the plant retirement.
2021 will be a unique period for installed nuclear power
generation throughout the lower 48. Scheduled for retirement are
three nuclear plants totaling 5.1 GW of capacity, a 5% reduction to
the operating nuclear fleet and a record removal of nuclear
capacity in a single year. On the other hand, for the first time in
the last 30 years, there is a nuclear expansion set to go online in
November which will add 1.1 GW to an existing plant located in
Georgia. The impact of these atypical changes to the US nuclear
fleet on regional natural gas markets are material in 2021, but
likely be most keenly felt in 2022.
