LONDON (Reuters) - (John Kemp is a Reuters market analyst. The views expressed are his own)
U.S. power producers burned an unusually large amount of natural gas in June and their gas consumption will almost certainly hit an all-time record in July as a result of the heat wave that hit much of the country.
Warmer than normal weather is maximizing electricity demand while cheap gas prices provide a strong incentive to meet it by running gas-fired rather than coal-fired plants.
Power producers burned 1,011 billion cubic feet of gas in June 2016, a record for the month of June and an increase of 9 percent compared with the same month in 2015 (tmsnrt.rs/2bRzBDO).
Power producers’ gas consumption during the whole of the first half of the year was almost 8 percent higher than in 2015 (“Electric Power Monthly”, U.S. Energy Information Administration, Aug 2016).
Increased gas consumption is being driven by a combination of more and larger gas-fired power plants and higher capacity utilization rates.
The number of gas-fired power plants in service increased by just 11, or 1.2 percent, between June 2015 and June 2016.
But total in-service capacity of natural gas-fired power plants rose by 9,900 megawatts, or 2.3 percent, over the same period.
And capacity use was sharply higher for all types of gas-fired generation as cheap gas prices encouraged plant owners to run them for more hours (tmsnrt.rs/2bRzZlR).
Combined-cycle plants produced 64.4 percent of their maximum potential in June 2016 compared with just 61.8 percent in June 2015.
Steam turbines, which are less efficient, produced 17.3 percent of their maximum potential output compared with 14.0 percent a year earlier.
Combustion turbines, mostly used for short periods to meet peak power demand, ran at 9.9 percent of maximum capacity compared with 8.3 percent in 2015.
Gas-fired plants have seized market share from coal, which has fewer plants and less capacity than in 2015 and utilization rates have dropped (tmsnrt.rs/2bV9OIx).
Total coal-fired generating capacity declined by 5 percent and utilization rates fell from 62.5 percent to 60.6 percent.
Power producers’ coal consumption dropped to 63.3 million tons in June 2016 down from 69.2 million tons in June 2015 according to the EIA.
Gas-fired power plants have benefited from a sharp drop in their fuel costs in both absolute terms and relative to coal.
Both gas and coal prices have dropped over the last year but gas prices have fallen more, which has shifted the generation mix (tmsnrt.rs/2bVatcX).
Gas costs for power producers fell by more than 14 percent between June 2015 and June 2016 while coal costs were down by nearly 8 percent.
Gas consumption is set to continue increasing sharply over the next 12 months unless fuel prices rise from their current level.
The EIA estimates that power producers will add another 13,700 megawatts of gas-fired capacity, an extra 3.1 percent, by June 2017.
Nearly all of the increase will come in the form of super-efficient combined cycle plants that operate with much higher capacity factors than steam or combustion turbines.
Generation capacity at combined cycle plants is forecast to increase by more than 5 percent over the next 12 months.
Gas consumption across the power sector will rise significantly in 2017, unless fuel prices rise to curb utilization rates.