Popularity of natural gas costing electricity users

Call it the natural gas paradox: The more abundant and inexpensive the fuel becomes, the more it seems to cost New England electricity users.
For the second year in a row, electricity rates are spiking over the winter due to soaring demand for natural gas, which continues to strengthen its position as the dominant fuel source for both heating and power generation in the region.
Utility National Grid has requested a rate hike for the six months starting in January that would see the average residential electricity bill jump 23.6 percent compared with the previous January. This year rates rose 12.1 percent above the winter of 2013.
Commercial customers of National Grid’s “standard offer,” which operates as a default plan for most of the state, will not fare any better, receiving a 24.2 percent increase for the next six months.
Industrial rates are adjusted on a monthly basis and are expected to spike from just over 7 cents per kilowatt hour in November to more than 20 cents per kilowatt hour in January.
The Public Utilities Commission is scheduled to vote on the request on Dec. 23 and may opt to spread it over 12 months, instead of six, to soften the impact.
The rate request provoked indignation from state political leaders, but utility regulators and the nonprofit organization that manages New England’s power system, as well as National Grid itself, were quick to dispel the notion that the hikes were a result of new spending or profit seeking.
The charges represent the cost of the electricity National Grid bought on the wholesale market and is passing directly through to consumers.
Any charges National Grid wants to pass along to the consumer – such as capital spending, administrative costs, employee salaries or anything else – are approved in a separate process that takes place in the spring.
“This is not 1986 where we have vertically integrated utilities making power, selling it and owning the wires,” said R.I. Public Utilities Commission spokesman Thomas Kogut about National Grid and rates. The root cause of these unpleasant price spikes is in the broader wholesale electricity market and the changing dynamics of power production.
Price spikes this winter will likely be even worse across the border in Massachusetts, where NStar requested a 29 percent rate increase and National Grid 37 percent.
As has been the case for a few years now, electricity prices surge in the winter because so many New England power plants are now fired by natural gas and must compete with the growing number of customers who use the fuel for heat.
Because power plants buy gas on the spot market, while gas for heating is secured through longer-term contracts, during cold spells the fuel becomes scarce and the prices plants pay soars.
With the so-called “fracking boom” increasing domestic production of natural gas, most of the country has enough of the fuel for both heating and electricity. In most of the South and Midwest, electricity prices stay well below New England rates all year.
But New England is supplied by only two primary gas pipelines and they struggle to meet demand when it surges for both heat and electricity.
Plans to build new natural gas pipelines, including a push by New England governors to finance construction through regional electricity bills, have faced opposition from environmental groups and Massachusetts residents who would be near them.
“While we are working hard to improve the economy and attract new businesses, the cost of energy puts our state at an economic disadvantage and is a tremendous hardship to many of our families,” said House Speaker Nicholas Mattiello, in a November letter to House members.
For New England companies or those looking to move here, the question is whether challenges facing new pipeline construction combined with the closure of nongas power plants could keep winter rate spikes going indefinitely. While the pattern is unlikely to go away in the next year or two, in the long run there are a number of potential factors that could eventually relieve the winter pressure on natural gas.
For one thing, while resistance to the most controversial new pipeline project – Kinder Morgan’s Tennessee Gas Pipeline – is formidable, there are enough expansion proposals in the works that it’s likely at least some will be built.
Spectra Energy Corp. has three separate projects that would expand capacity: the Algonquin Incremental Market project, which would replace an existing pipeline through Connecticut with a larger one; the Atlantic Bridge project, which would connect the Algonquin with Maine and Atlantic Canada; and the Northeast Access pipeline, which would further supplement Algonquin over existing rights of way. Algonquin Incremental Market is scheduled to open for the winter of 2016-2017, with Atlantic Bridge and Northeast Access following in the next two winters respectively.
Northeast Access, in which Northeast Utilities is a 50 percent partner with Spectra, has been pitched specifically to reduce electrical-generation volatility.
Another project involving TransCanada Corp. would use mostly existing infrastructure to carry gas north through New York State into eastern Canada and then back south to New England.
Kinder Morgan recently shifted the proposed route of the Tennessee Gas Pipeline in Massachusetts to the north to take advantage of existing rights of way in New Hampshire. The company lists an expected opening date of late 2018.
C. John Meeske, president of Energy Market Decisions Inc. in Hopkinton, Mass., and a veteran gas-industry consultant, said although New Englanders are dealing with electricity sticker shock now, natural gas shortages are unlikely to continue forever. “There are some good signs for us in the short term; the price of crude oil has dropped,” Meeske said. “Additional pipeline capacity in the region should go into service by fall of 2016 with additional capacity becoming available in 2017 and 2018.”
Lower oil prices could also make it more likely that exporters of Liquefied Natural Gas will ship to several of the now-idle Massachusetts terminals, Meeske said. More LNG could take some of the pressure off conventional natural gas during extreme cold-weather periods.
And while they also face environmental opposition, plans for new electric-transmission lines to connect to Canadian hydropower also provide an avenue for lowering winter electricity prices.
ISO New England, the nonprofit manager of the region’s electric grid and wholesale market, has been issuing warnings about the over-reliance on natural gas for the last few years, and for the second year in a row is running a program to guarantee at least some alternative power sources are available in the event of major gas shortages.
Thanks to these and other programs, the region “should” have the generating capacity to make it through the winter without any rolling blackouts or other service disruption, ISO wrote in its “2014-2015 winter outlook.”
But even if gas-pipeline expansion projects are completed in the coming years, ISO warns that the coming retirement of coal, oil and nuclear plants will continue to pose a risk that disruptions to gas supplies could threaten the system.
In addition to the retirement of the Salem Harbor coal plant and expected retirement of the Vermont Yankee nuclear plant by the end of the year, ISO estimates that 8,300 megawatts of generating capacity could retire by 2020. Peak demand during very cold weather is about 23,325 megawatts. •

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