Cold Snap Sends Energy Prices Into Stratosphere In New England
William Pentland, Contributor
Content from Forbes 12/12/2013
The widely predicted explosion in New England’s energy prices has started sooner than most people expected.
The price of natural gas at Boston’s Algonquin Citygate climbed from $4.13 per MMBtu last Wednesday to $20.40 on Tuesday.
Natural gas prices are tightly correlated with electric power prices in New England. These near-record natural gas prices at the Algonquin trading point pushed forward, wholesale power prices up to more than $100 per megawatthour (MWh) at the Massachusetts Hub for December 2013.
While the $100 per MWh future price may have seemed high at the time, the actual market price is likely to be significantly more than that amount. The real time locational marginal price spiked above $350 per MWh in southeastern Massachusetts early this morning and remained above $250 per MWh for most of the day.
To put this in perspective, spot prices for wholesale, on-peak power in New England are typically between $30 and $40 per MWh.
What explains the sudden and severe price spike?
New England’s demand for natural gas has soared in recent years but the infrastructure needed to supply it has not.
Natural gas now accounts for more than half of New England’s power generation. As a result, pipeline constraints have exacerbated the volatility of natural gas and electric power prices during periods of high demand, especially in the winter.
Indeed, the deliverability of natural gas in New England has arguably declined in the most recent years as the result of the steep decline in LNG and Canadian imports.
Although the surge in shale gas production has driven down natural gas prices in most of the United States in recent years, constraints on key pipelines supplying New England with natural gas have resulted in severe (albeit usually short-term) spikes in spot prices for natural gas in Boston during winter months.
Natural gas buyers tend to bundle the value of pipeline capacity and the cost of their gas commodity purchases into a single unit – the cost to deliver the product to their facility.
In New England, treating pipeline capacity rights as anything other than a commodity itself is a good way to lose your shirt.
In the past, pipelines could generally deliver all of the gas that was “nominated” (i.e., requested) at any given time by their customers without a firm contract for gas delivery. That is no longer the case today and will be even less so in the coming years. When gas demand spikes, customers without a firm capacity contract must either curtail usage, buy high priced gas on the spot market or switch fuels.
Non-firm gas customers in New England and New York relying on the natural gas spot market this winter saw prices spike to nearly $40 per MMBtu, while gas prices remained in the $4 range in other regions of the United States.
If the past two days are any indication of what is likely to come, this winter could be worse than last winter.
When it gets cold, residential customers are given the natural gas usually used by power generators. Fuel oil fills the void left when gas-fired power generators go offline due to inadequate fuel supply.
The result: high electric power bills and dirty air.