Pipeline constraints could hurt winter energy market prices in New York, Boston and Los Angeles
Energize Weekly, October 24, 2018
A forecast for a mild winter and adequate electricity generating capacity are good news for the winter energy markets, but pipeline constraints could create risks for several major cities, according to a Federal Energy Regulatory Commission (FERC) assessment.
The growing dependence on natural gas-fired generation coupled with the pipeline issues could also “have significant implications for fuel security,” the FERC Winter 2018-2019 Energy Market Assessment said.
The winter season is also beginning with the lowest natural gas inventories, 3,308 billion cubic feet, since 2005, a 12.5 percent drop from last year’s level, according to the federal Energy Information Administration (EIA).
Weather is a key determinant in the winter energy market and the National Oceanic and Atmospheric Administration (NOAA) is forecasting warmer than average temperatures.
The market analysis said that even a warmer winter “may still have prolonged periods of cold temperatures that can stress natural gas and electricity markets, as demonstrated by last winter’s weather event known as the ‘Bomb Cyclone.’”
That blizzard, from December 26 to January 8, engulfed the U.S. east coast with cold fronts and record snowfalls. The four independent system operators or grid operators most impacted by the storm–ISO-New England, New York ISO, Midcontinent ISO, and PJM—all experienced high peak loads.
On January 17, 2018, regional operators in the Midwest and South-Central U.S. issued public appeals for consumers to voluntarily reduce their electricity use due in the face of abnormally cold temperatures and higher than forecast electricity demand.
If there was a similar event, pipeline constraints on the Algonquin Gas Transmission, Transcontinental Pipeline, and Tennessee Gas pipelines could lead to price spikes for New York City, Boston and their metropolitan areas, the assessment said.
Southern California is also facing supply constraints and price volatility due to infrastructure outages. “The natural gas infrastructure limitations in southern California increase the risk to electric reliability in California, as much of the region is dependent on natural gas generation to meet electric peaking and ramping requirements,” the analysis said.
Basis futures prices are already reflecting the concerns about winter pipeline constraints. The Henry Hub futures prices was $3.12 per million British thermal units (MMBtu) on October 1, 24 cents below the year earlier price.
Basis future prices for New York City, on October 1, averaged $6.03 MMBtu, up 47 cents from October 2017, and the Boston future price was $8.21 MMBtu, a $3.40 increase.
Natural gas inventories in every region of the country are below their five-year averages, according to the assessment. The draw down on inventories began last winter and continued through the spring and summer.
“Total U.S. natural gas consumption hit record highs for the summer season, averaging 71.9 billion cubic feet per day. The main contributors to the increase in natural gas demand were electric power generation and LNG exports,” the FERC analysis said.
In its preliminary 2018‐2019 Winter Reliability Assessment, the North American Electric Reliability Corp. estimated that reserve margins for all assessment areas will meet reference margins this winter.
Most of the additional capacity planned for the coming winter will be powered by natural gas, solar, and wind, according to EIA.
“Although all regions are expected to maintain healthy reserve margins through the winter, reserve margins are not always guarantors of reliable operations during the winter,” the market report said. “Staff notes that fuel availability, particularly natural gas and fuel oil, and transmission systems can affect electric reliability, and must be regularly and comprehensively monitored.”
The FERC staff said that “the growing reliance on natural gas in the electricity sector has significant implications for fuel security and natural gas to oil switching by dual‐fuel capable generation units.”
In some regions efforts are underway to ensure there are adequate fuel supplies during extreme or extended cold weather when power generation and heating compete for natural gas.