Source:  Citi Research

EIA 61-Bcf build as gas switching fell: Run rates of Texas coal units rose sharply as gas prices climbed

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§  The gas inventory surplus to last year only narrowed to 748-Bcf, pointing to the need for gas switching to be strong before and after summer. An average of 5 to 6-Bcf/d of switching is still required from now through to the end of the injection season to work off the excess gas. Note that on days with very higher power demand, when most power plants are running, including coal, switching actually goes down. To make up for the reduction in switching in summer, stronger switching is needed on most other days. First, to work off the inventory overhang of 748-Bcf, the weekly injection number has to be about 23 to 28-Bcf/week smaller than last year’s figures to put gas inventory between 3.8 to 4.0-Tcf before the start of winter. Working off this inventory overhang alone requires gas demand to be between 3.3 to 4.0-Bcf/d higher than last year. Second, total gas supply is also higher by about 2-Bcf/d due to stronger gas production y-o-y. Hence, the total amount of excess gas is about 5 to 6-Bcf/d above last year’s level, implying a need for nearly the same amount of gas switching on average to absorb this gas. As such, switching has to be larger on most days.

§  Higher gas prices are reducing the amount of switching, particularly in Texas, where utilization rates of power plants burning cheap Powder River Basin (PRB) coal are rising sharply. (Figs 2, 3) Katy hub prices as proxies for local gas prices in Texas rose to $2.3/MMBtu last week, implying a marginal cost of generation of about $23/MWh for a single-cycle, intermediate load gas-fired power plant. Three weeks ago, the generation cost for the same type of units was $18/MWh, compared with a marginal cost of about $21/MWh, fuel only, for those Texas coal units burning PRB.

The charts show coal utilization in Texas in the high 20's% to low 30's% in March and early April have now risen to about 60%.