As Winter Takes Hold, Plunging Temperatures Test Utilities

Source: By CLIFFORD KRAUSS, New York Times • Posted: Friday, January 10, 2014

The frigid weather presented a big test for utilities, especially in the Northeast, which have switched from coal to gas power in the last decade. Joshua Bright for The New York Times

The short-term price of natural gas in the Northeast eased on Wednesday after surging during the cold snap this week, but many consumers face the prospect of higher bills as utilities seek to pass along the added costs.

Already, several utilities, including Connecticut Light and Power as well as National Grid and NStar, which serve Massachusetts, have recently announced increases in their retail electricity rate as they struggle to meet peak periods of demand.

On Tuesday, for example, spot prices for a few large energy customers in the region spiked nearly 10 times higher than national prices as demand for electricity and heat soared and overwhelmed pipelines taking gas supplies to the region from the south and west.

Many power providers compensated by importing more gas from Canada through pipelines that have been mostly underused in recent years and through imports of liquefied gas supplies.

Utilities also bought more coal- and oil-fired power, which is normally priced higher than gas but has recently been lower because of constraints in gas pipelines

All the while, electricity grid operators pleaded with customers to conserve energy by lowering their thermostats, and they asked gas customers to switch to other fuel sources.

The frigid weather presented a big test for utilities, especially in the Northeast, which have switched from coal to gas power in the last decade as cheap natural gas from the Marcellus shale field became available.

“The power system in New England has performed as expected so we’ve been in good shape through this latest cold snap,” said Marcia Blomberg, a spokeswoman for ISO New England, a big operator of the regional grid. “The system has held up.” There were no serious interruptions of power reported and utilities were not forced to conduct rolling brownouts to prevent a blackout.

“The system is big, diverse and robust,” said Michael Lynch, president of Strategic Energy and Economic Research, a consultancy based in Amherst, Mass. “Some of the utilities have to buy some coal power and small amounts of gas at high prices, but a lot of adjustments across the system are enough to cope.”

Mr. Lynch said consumers would probably face higher electricity rates in coming months because “this winter has been colder than normal and because natural gas prices have recovered.”

The spike in prices on Tuesday was significant. On the wholesale market, a megawatt-hour of electricity, an amount of energy that would run a big suburban house for a month and which on normal days sells for $40 or $50 in many locations, was going for $500 to $1,000 in New Jersey, Delaware and big areas of Pennsylvania and Maryland.

In parts of New England, the prices were over $200. In New York City, wholesale prices were under $200, mostly because generators were burning oil, whose price does not spike seasonally as much as the price of natural gas does.

With prices falling on Wednesday, energy experts expected the trend to continue as temperatures climb through the rest of week.

Nationally, gas prices remained at historically low levels and declined substantially on Wednesday to just over $4.20 per thousand cubic feet despite surging national power demand and recent large withdrawals of gas from stored inventories.

Nevertheless, the Energy Department, in a report this week, raised its estimated 2014 average price by 11 cents, to $3.89 per thousand cubic feet.

The gas drilling boom in Appalachia and other shale fields around the country, made possible by technical improvements in drilling dense shale rocks, led to a plunge in gas prices and a sharp shift over the last decade from coal-fired generation nationwide, and from heating oil in the Northeast particularly.

Natural gas provided less than 30 percent of the electricity generated in New England in 2001, but now provides more than 50 percent, well above the national average. Gas pipeline capacity has been more than adequate during the summer months, but the pipes are sometimes constrained in the winter since gas not only produces electricity but also heat for homes and businesses in cold weather.

There were several regional gas price spikes last winter, including in the metropolitan New York area. But over the last year, several gas pipeline expansion projects connecting the Marcellus field to New York and New Jersey have eased concerns, and more expansions are scheduled through 2015.

Still, the building of additional pipeline service to New England has fallen behind, and consumers there will probably need to wait until 2016 for an expansion of Spectra Energy’s Algonquin Incremental Market pipeline project to bring significant new Marcellus gas production through Connecticut, Massachusetts and Rhode Island.

Twenty interstate pipeline systems operate between Virginia and Maine, delivering gas from the Marcellus field as well as the Gulf of Mexico region and Canada. But as quickly as pipelines have been built, the depressed price of natural gas has forced producers to cut back on their drilling plans and encouraged pipeline companies to refrain from investing even more robustly on new pipelines. At the same time, rapidly growing renewable sources like wind and solar have taken some market share from natural gas.

“It’s not a reasonable expectation that pipelines will be built out in a smooth well-coordinated pattern given that power demand and gas-fired generation is very difficult to predict into the future,” said Lawrence Makovich, chief power strategist at the IHS-Cera energy consultancy. “That complexity means there will be cyclical, strongly seasonal and sometimes volatile delivered gas prices.”

Some energy analysts caution that the region’s energy diversity is narrowing, and that the recent increases in the natural gas spot price should be viewed as a warning.

They warn of trouble because of the expected retirement of aging coal-fired plants, particularly the Brayton Point power plant in southeastern Massachusetts, which is scheduled to be shut down in 2017. The plant has long been a target of environmental groups as a heavy polluter.