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Winter test still ahead for U.S. power grid

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Kent Knutson's picture
Kent Knutson 10040
Energy Market Specialist Hitachi Energy USA Inc.

Kent Knutson is a market specialist focusing on energy industry intelligence for Hitachi Energy.  He has more than 30 years of experience designing and developing intelligence products for some...

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The higher price of natural gas and the diminished supply of coal heading into the next few winter months weigh heavy on grid planners as they prepare for the possibility of severe winter weather ahead.  Historically when gas prices have increased coal has filled the gap, and 2021 has not been an exception.  Through September 2021, coal electricity production was up 22.4% (145.2 million MWh) from the same period in 2020.  Wind and solar are up as well, 14.7% (46.3), while natural gas declined 4.8% (-60.4).  The key driver behind the shift from gas to coal has been price.  The average price of natural gas delivered to power plants through the first nine months of 2021 was $4.83/MMBtu – more than double the $2.26/MMBtu for the same period in 2020. Meanwhile, coal delivered to power plants was averaging $1.96/MMBtu through September – about the same as in 2020. This trend, driven by possible supply constraints during the coming winter months, is expected to continue into next year.  Fearing potential natural gas supply constraints, the CME Henry Hub futures contracts were driven up above $6/MMBtu in October for delivery in January and February 2022 but have fallen back to around $4/MMBtu since then – still considerably higher than last year.

U.S. electricity production by fuel, March 2019 thru September 2021, MWh

Coal inventories at power plants at a 43-year low

The recent surge in coal burn has impacted the amount of coal inventories on hand at power plants.  At the end of September, coal stockpiles were roughly 80 million tons – that’s the lowest reported month-ending inventory figure in 43 years.  In May of 2020, inventories ended the month at nearly 154 million tons, and as recently as May of 2021, stocks were roughly 120 million tons.  In four short months, coal stocks have declined by 33.4% – about 40 million tons.  Higher natural gas prices and subsequent growth in coal demand are not the only drivers behind lower stockpiles this year.  The large number of coal plant retirements and the significant decrease in utilization at operating plants over the past several years have also contributed to inventory shrinkage.  

U.S. monthly power industry coal purchases, consumption, and month-ending inventories, tons

The good news for grid reliability is that despite the relatively low inventories, the number of days’ burn is typical of past late fall levels – between 80 and 90 days of coal on-site.  In addition, coal production is showing signs of life.  According to weekly production estimates compiled by Hitachi Energy’s Velocity Suite research team, production during the past four weeks was running roughly 10% ahead of the same period in 2020.  When the final coal production figures are tabulated for 2021, it will show the first year-on-year increase in coal since 2014. 

U.S. week-ending coal production, January 2017 thru November 2021, short tons

Having fuel on the ground is like having a huge, long-duration battery when winter storms strike.  It is an important dispatchable component of the power grid.  During last year’s February Winter Storm Uri, coal played a significant role in keeping the lights on across the central states’ power markets, and even, to a lesser extent, contributed to Texas power supply during the outage-plagued week.

During winter months, coal consumption by electricity producers is elevated but not typically as high as during the summer heating season.  With higher natural gas prices forecast, coal demand will likely remain relatively high through the winter. 

With higher gas prices expected and coal inventories down, organized power markets have shown concern.  The largest regional transmission organization (RTO), the PJM Interconnection, has recently announced temporary changes to their minimum stockpile requirements to enable power plant operators to build more inventory for the winter months. The PJM footprint spans 13 states and the District of Columbia.  

Higher energy prices mean higher electricity prices

In September, retail electricity rates were 6.4% higher than the same month in 2020.  Power consumed by industrial customers (up 10.1%) led the sector increases, while power consumed by commercial (up 6.7%) and residential (up 5.2%) customers followed.  The average monthly rate for U.S. residential customers topped 14 ¢/kWh for the first time in September.  Driven by higher fuel costs, customers across most states experienced significant increases in average electricity rates in 2021.  Comparing September 2021 with the same month in 2020, 46 states and the District of Columbia reported increases in average retail rates. 

U.S. average monthly retail electricity rates, March 2019 thru September 2021, $/MWh

Topping the list of states with the highest overall rates in September is Hawaii, where the average retail price was just above 31 ¢/kWh in September – up 14.6% from the same month in 2020.  Following Hawaii was California (21.6/up 9.1%), Alaska (20.3/up <1%), Massachusetts (19.9/up 10.1%) and Connecticut (19.6/up 4.2%).  There were four states recording lower average retail rates in September than the previous year.  They include Wyoming where retail rates averaged 8.3 ¢/kWh – down 3.2% from 2020, Nebraska (9.3/down 2%), Nevada (9.3/down 1.85), and North Carolina (9.9/down 0.5%).

Higher energy prices on tap       

The higher gas prices and record low coal inventories at power plants mean higher energy prices as the country enters the winter heating season.  In early October, the U.S. Energy Information Administration (EIA) released the Winter Fuels Outlook for 2021-22 that runs from October thru March of 2022.  Energy prices across all fuels are expected to be much higher than last year.  Considering average household expenditures, the base case scenario for natural gas is projected to be roughly 30% higher than last winter.  If the winter turns out to be 10% colder than average, that figure rises to 50% higher.  It makes sense that electricity bills will be higher as well since most electricity production in the U.S. is derived from natural gas.  Electricity under the base scenario expenditure forecast is expected to run 6% higher but rise to 15% if weather conditions are 10% colder than projected.

U.S. forecast of average household energy expenditures for October/2021 through March/2021

Source: U.S. Department of Energy (DOE) Energy Information Administration (EIA) Winter Fuels Outlook, Winter 2021-22

The chart below, also from EIA’s Winter Fuels Outlook, provides trends in energy prices since the winter of 2011-12.  The forecast projects significant increases across the board across all fuels this winter.

U.S. winter energy price trends by region including Winter 2021-22 forecast

Source: U.S. Department of Energy (DOE) Energy Information Administration (EIA) Winter Fuels Outlook, Winter 2021-22

Dispatchable natural gas, coal, and baseload nuclear resources are expected to fuel most of the power supply during peak demand periods this winter, even though there is more wind and solar capacity operating today than in any other period in history.  The nascent battery energy storage industry is beginning to take off and is expected to play a more important role in the future, but for now, coal and natural gas are necessary fuel resources to keep the lights on.  The higher price of natural gas and the diminished supply of coal heading into the next few winter months weigh heavy on grid planners as they prepare for the possibility of severe winter weather ahead and keeping the grid up and running.

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