With storage inventories soaring to record-high levels and production remaining relatively flat, the U.S. natural gas market is in dire need of record demand this summer to balance storage. All eyes are on power generation to soak up the gas storage surplus. Low gas prices and increased gas-fired generating capacity makes natural gas the go-to generation fuel this year. However, in the largest summer demand market – Texas – natural gas is facing increasing competition from wind. Wind power still provides a much smaller share of Texas’s power than natural gas, but the addition of several big wind farms in 2015 gives wind a stronger footing in the Texas market this year. Today we take a closer look at the potential impact of growing wind generating capacity on natural gas demand, particularly in Texas.
We talked about the market’s dire need for incremental, even record demand recently in our “Carry That Weight” series of blogs. The gas market started the storage injection season in April (2016) with a record storage overhang, and mild weather since then has suppressed demand and limited the market’s ability to whittle down the surplus. However, if we discount the effects of the milder-than-normal weather, demand actually has been exceptionally strong on a degree day basis and could easily reach record highs this year if we get a normal-to-hotter summer weather. But now there is another potential factor that could blunt demand as well – wind generation, especially in Texas. Before we get to that though, first let’s put Texas power generation and wind into perspective.
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About the song
"Against the Wind" is a song by Bob Seger & The Silver Bullet Band from the 1980 album Against the Wind. It is the highest ranking single from the album, peaking at #5. In 1981, the song also won the Grammy award for Best Rock Performance by a Duo or Group with Vocal.
Comments
Sheetal,
Thanks for the piece, which was interesting reading. As both a wind and natgas power investor in ERCOT, although I appreciate the analysis, there are a few items that the piece appeared to overlook:
1. By all industry accounts, wind generation in 2015 was at a very low level in ERCOT compared to expectations (or expected P50 forecasts), indeed (I believe anecdotally) around a P85 level. Those low 2015 results would impact your 2016 vs. 2015 wind generation comparison, making the inter-year growth appear much higher than it would be on a wind-normalized basis.
2. Your first table shows growth in capacity (MW) over the past 25 years, but not generation (MWh). As Texas wind farms, particularly those pre-2011, generally have lower net capacity factors (<=40% or less as a guess) than new natgas power plants, showing a comparison by capacity would overstate the growth of wind in terms of its contribution to actual annual generation over the same period, as its relative contribution per MW of capacity of wind vs. gas-fired generation would have been lower.
3. I am assuming your second table is indeed MWh of generation, not MW of capacity, although that is not how it is labeled. More years of data would provide a much less volatile data set.
4. Wind generation inland in Texas/ERCOT is seasonally lower in the summer than the winter or shoulder months, so its impact on natgas generation during the summer would be proportionally less, which your last paragraph does not mention when you calculate its impact using the rough rule of thumb. For example, for new farms in ERCOT West, projected Q3 generation (July-Sept) is generally -33% to Q1 (Jan-Mar) generation, so inland wind's lower NCF in the summer months would need to be incorporated in your calculations; ERCOT has historical seasonal monthly wind generation data to construct a summer adjustment.
5. Also, as intermittent wind generation is added to the ERCOT grid, the importance of fast-ramping, natgas-fired generation to grid stability becomes even more important so that is another offsetting effect.
These facts don't necessarily invalidate your story, but they may blunt the actual impact of wind on natgas consumption and pricing, particularly during the peak summer season.