Frigid weather causing spike in natural gas prices

Power generators switch to oil as pipeline debate resumes

FRIGID LOW TEMPERATURES are pushing up energy demand across New England, sending the price of natural gas soaring and prompting many of the region’s power generators to switch from gas to oil.

The conditions are somewhat reminiscent of the polar vortex that enveloped the region in the winter of 2014 and prompted the debate about whether the region needs more pipeline capacity to keep natural gas prices in check.

A spokeswoman for ISO-New England, the region’s power grid operator, said on Thursday that “high demand for natural gas is causing natural gas pipeline constraints that are resulting in high natural gas prices.”

Bloomberg News reported on Tuesday that spot wholesale prices in New England for natural gas more than tripled to their highest level in more than three years, turning the region into “the world’s priciest market.”  The price of gas for next-day delivery in New England was $35.35 per million British thermal units, a level not seen since February 2014, Bloomberg reported.

According to the ISO-New England website, the high cost of natural gas has prompted many power generators with dual-fuel capability to switch from gas to oil, which increases power plant emissions.

As of 1:30 on Thursday, the ISO-New England website said the region was relying on oil for 31 percent of its power generation, nuclear for 26 percent, natural gas for 20 percent, renewables for 12 percent, coal for 6 percent, and hydro for 5 percent.

Typically, natural gas is the fuel used for 49 percent of power generation, followed by nuclear (31 percent), renewables (10 percent), hydro (7 percent), coal (2 percent), and oil (1 percent).

Dan Dolan, the president of the New England Power Generators Association, said the large-scale shift to oil is something he hasn’t seen in three to four years. He said it’s partly a reflection of a long, sustained cold snap coming in the very early part of winter.

During the winter of 2014, cold weather caused demand for natural gas to increase beyond what existing pipelines could bring into the region. Many power generators that relied on natural gas to produce electricity were unable to procure additional supplies, and were forced to shut down. The fallout for consumers from the wholesale price spike during 2014 came the following winter, when electricity prices rose as much as 37 percent as power suppliers feared the same scenario would be repeated.

Since that winter, ISO-New England has taken a number of steps to avoid a repeat, including offering incentives to power generators to stock up on oil (if the generator can run on oil or natural gas) and liquefied natural gas before the winter by offering to compensate them if their fuel goes unused. Previously, power generators had kept limited amounts of backup fuels onsite to avoid being stuck with unused inventory.

ISO-New England issued a cold weather watch for Thursday and Friday, which means extreme cold weather is forecast and the region has a capacity margin of 1,000 megawatts or more. A watch is the lowest level of the three types of alerts – watch, warning, and event.

“Sufficient capacity is expected to be available to meet demand and reserve requirements, and there’s no request for public conservation,” the ISO-New England spokeswoman said in a statement.

Proponents of expanding natural gas pipeline capacity into the region seized on the cold snap to rekindle the policy debate on the issue. The debate subsided for much of the year amid opposition in the Legislature to expanding reliance on fossil fuels and a Supreme Judicial Court ruling that stymied a Baker administration bid to finance new gas pipelines with charges on electricity customers.

Michael Durand, a spokesman for Eversource Energy, a regional utility and a company interested in building new pipeline capacity, said the firm has been monitoring the spike in wholesale energy prices.

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Bruce Mohl

Editor, CommonWealth

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

“The best way to prevent these dramatic winter price spikes and ensure future electric service reliability is to increase the capacity of existing pipelines that deliver clean, domestic natural gas into New England,” he said in a statement.

Dolan, of the New England Power Generators Association, said the pipeline debate shouldn’t center on the wholesale price for natural gas over a few weeks or even a month. He said the debate should center on pricing over six months or a year. That way, he said, consumers can evaluate the financial benefits of building new pipeline capacity to suppress spending for a few weeks a year.

  • NortheasternEE

    This problem is the result of the early retirement of coal and nuclear baseload power plants. State and regional mandates and policies for renewable energy aimed to 100% is sending the message that there is no future for baseload power. Only flexible natural gas can balance the grid against the intermittent and variable power by renewable wind and solar generators. In the past only about 10% of peak load was variable and needed natural gas firming. Each megawatt of wind and solar connected to the grid increases the variability grid operators must address with flexible natural gas.

    Increasing pipeline capacity for natural gas only means that the new capacity will only be used once or twice a year to address peak demand. Any way you look at it rates will have to double and quadruple to cover the added cost of renewables, and as long as the goto power to balance the grid is natural gas or oil, CO2 emissions will continue the path to Global Warming.

  • Ed Cutting, Ed. D.

    Additional pipeline capacity makes sense just because of potential emergencies.

    If all the existing lines are at 100% and something goes wrong, then what…

    • NortheasternEE

      Long pipelines to Pennsylvania and long transmission lines to Canada increase the potential for emergencies. Grid resilience that lowers the potential for emergencies is better served by increasing power plant local storage of fuel. We need either stop closing coal and nuclear power plants and/or increase storage of liquefied natural gas.

  • This repeats the standard nonsense one hears from the likes of Eversource and other apologists for natural gas and natural gas pipelines. It is incorrect.

    While it is correct in terms of PRICE PER KILOWATT HOUR, the facts are that the average home in Massachusetts pays less per month for electricity than in most of the states in the United States. Why? Because Massachusetts homes are much more efficient than in most states, and so less electricity is used. The rapid adoption of residential solar has helped.

    Why is the cost per kilowatt hour so high? It is high principally because Most of the utilities have really old equipment, including distribution lines, which require repeated, reimbursed repairs, as well as old technology in substations. As a consequence, the operating overhead of companies like Eversource/NSTAR are high. Moreover, because Massachusetts home are so efficient, there are fewer kilowatt hours over which to distribute these high overhead charges, and the result is that the price per kilowatt hour is high. And it doesn’t help that the operating margins of Eversource/NSTAR, judging by their payout rates, is the highest of any investor-owned electrical utility in the United States.

    Finally, well-documented practices by Eversource have artificially constrained pipeline capacity, denying competitors access to it, resulting in ever higher natural gas prices. This study, by Marks, Mason, Mohlin, and Zaragoza-Watkins, from UC Santa Barbara, University of Wyoming, and MIT who are well-respected (and often hired!) energy economists, was presented at an IAEE conference early in 2017. (See https://papers.ssrn.com/sol… and other free online sources, notably from the Environmental Defense Fund, at https://www.edf.org/sites/d… While denied by Eversource as misrepresentation and showing ignorance of how pipeline capacity markets work, the substance of their denial, that they were just assuring adequate capacity and supply for their customers, was addressed in the original study. The evidence for such manipulation is very dramatic and atypical of their competitors, and to the degree to which Eversource and Avangrid are typical users of natural gas, deserves more explanation.

    Either Eversource PR chose not to read the study or selectively chose to ignore parts. They explained that “no-notice contracts” were also held and paid for, permitting such shipment in case of constrained pipeline capacity, and that there was no obvious reason to reserve capacity if such contracts were held. Moreover, the constraints were imposed at a location implausibly associated with the premise of providing adequate supplies to their networks, a section of pipeline downstream of its bottleneck at the Stony Brook compressor station in Connecticut. While that did not provide or affect their own supply to any great degree, it does have the effect of constraining supply to their competitors.

    If market manipulation is not the point of these inactions, then it is at least clear these operators are ignorant of the effects of their business decisions on the natural gas network as a whole, or don’t care about them. In short, they are exhibiting a lack of understanding on how to operate the energy network they, and people like Mr Dodge, want to expand. This incompetence, assuming it is incompetence, or at least price of anarchy, burdens the network with less efficiency than it otherwise is capable, and the shortfalls observed and lamented by Mr Dodge are due to such. He proposes to fix this by expanding pipeline capacity. At the very least any such proposal accompanied by the release and audit of the records and contracts which Marks, Mason, Mohlin, and Zaragoza-Watkins have indicated could prove intent one way or another, essentially the records of communications and contracts for capacity over time between Eversource and Avangrid and their shippers.