As noted in my previous write up, we could see a record amount of natural gas demand in the power sector if certain stars align. One of the major drivers is the price of natural gas. The two price components for natural gas is the benchmark location of Henry Hub price and the basis (price differential to Henry Hub).   In this Winter Power Outlook report, we ran over 50 cases.  Our gas price sensitivities included changing Henry Hub (28 sensitivities) and then just changing basis prices (10 sensitivities).  The below figure is a redacted output from the report.

For this winter, the correlation with Henry Hub price and power natural gas demand is very linear.   With the purchase of this report for only $3000, you will get the data and the associated linear equation.  This will give you grounds to estimate the power markets natural gas demand as a function of your expectations of Henry Hub.

Changing the price of Henry Hub also altered the coal demand.  The redacted figure below shows the relationship of coal demand and Henry Hub.  As in the natural gas demand figure, the coal demand outlook is very linear with the changing Henry Hub price.

Changing basis by a set percentage from 50% to 150% did not significantly alter the gas demand.   The basis impact altered gas demand by +/-2%.  However, power prices did significantly change.  In the Nepool region, the basis sensitivities produced nearly a +/-30% swing in on-peak power prices – see below figure.   The winter report will contain price output for all major power hubs in N. America with the associated simulations.

A common mechanism used in the industry to estimate natural gas demand is the usage of a relationship with Heating Degree Day (HDD).  However, in the power sector, that relationship is very fragile as location and price relationships can cause a non-linear relationship.   The figure below demonstrates this with simulations of each weather year between 2003 and 2013.

Your Grateful Energy Consultant,

David