New England is experiencing some of the highest spot electricity and natural gas price spikes in the country with some more than $30 per MMBtu and $200 per MWh! You may not notice if you have a fixed price during the winter, but if you are buying spot gas or power, you are probably aware. If you are soliciting quotes for any term that includes a future winter, hopefully you’ve noticed the impact.
During the past month, a confluence of events has hit this region, conspiring to drive electricity and natural gas markets to three times their three-year average. The chart below shows the recent high prices and volatility. It also shows the Nepool Mass Hub (in blue, left axis, the main trading location for electricity in the New England region) and the Algonquin Citygate (in red, right axis, the main delivery point for natural gas in the Boston area).
Click here for chart: High New England Energy Prices
There are three main reasons that the markets for natural gas and electricity have been so strong in New England recently.
- While not an exceptionally cold winter, the weather has been colder than last year’s record warm temperatures. Colder temperatures bring greater heating-related demand for natural gas, boosting prices.
- Natural gas imports to the region are low. In a region that hasn’t seen the new shale supply that many regions around the country have, imports are crucial. Imports to the region come from three primary sources:
- Via pipeline from the south and west. Natural gas has historically been imported from the Gulf Coast region via long pipelines. More recently, gas has come to New England from the Marcellus shale regions. From both regions, the gas pipelines getting to the Boston area are heavily constrained, without the capacity to import as much gas as is needed.
- From Canada. These imports are extremely important to this region, and they have been shrinking. Gas production from offshore rigs in Nova Scotia has been declining and new production has been slow. Imports from Western Canada have also been slowing because the traditional west-to-east Canadian pipeline flows have been disrupted due to new shale production.
- Via Liquefied Natural Gas (LNG). Imports to the Boston region via LNG have fallen by more than 50% this year compared to two years ago. Reasons for the decline are twofold: the US competes for LNG supply with Europe and Asia and prices there are far higher than in the US.Given the chance, producers of LNG will send their cargos to Europe and Asia.
- Demand for natural gas from the electricity generation sector has increased. As older, inefficient coal plants retire, they are replaced by cleaner burning natural gas plants.This places an increasing burden on the constrained pipeline system needed to import gas to the region.
When you look at all these factors, it combines for higher spot prices and greater volatility. Unfortunately, many of these problems are long-term and are fairly intractable; hence, prices for futures periods have moved up too. New gas-fired electric generators are the short-term solution for retiring coal plants and demand from that sector is forecasted to remain high. Imports from Canada are slowing but may rebound slightly as some offshore rigs are completed. LNG imports will remain low as prices globally are far higher those in the US. Pipeline capacity from the south and west is constrained and due to the cost and complexity of expansion, is likely to remain so. Diversifying the fuel mix for electricity generation would help alleviate the problem and plans are underway to expand wind generation. Energy efficiency programs are also a good option to deliver short-term reductions in demand.
You must be asking yourself: Is there any good news? Remember that regional gas and power prices are driven by a combination of national and regional factors. While the regional drivers are clearly bullish, the trend for national prices is still relatively low due to shale gas resources. The resultant price, while not as low as 2012, is still a reasonable value when looking long-term. Unfortunately, it seems very unlikely that the lows of 2012 will return to buyers of gas or power in New England.