Frozen Northeast Getting Gouged by Natural Gas Prices

As temperatures plunge anew into single digits across much of the U.S. Northeast, natural gas prices have been going in the opposite direction. On Jan. 22, thermostats in New York City bottomed out at 7 degrees, a day after the price to deliver natural gas into the city spiked to a record $120 per million British Thermal Units in the spot market on the outskirts of town. That’s about 30 times more expensive than what the equivalent amount of gas cost a hundred miles away in Pennsylvania’s Marcellus Shale, the biggest natural gas field in the U.S. and home to some of the lowest gas prices in the world. And you thought this was the age of cheap energy.

Most of the natural gas that gets used in the U.S. is contracted on a long-term basis and bought with futures and forward contracts, meaning that many consumers in the Northeast won’t feel the full brunt of that price spike. They’re not entirely insulated though. The spot market is there for a reason. Essentially, it’s a refuge for the desperate and unprepared—for those who need to buy or sell immediately. And when a natural gas-fired power plant or a big utility finds itself short, having underestimated the amount of demand it has to fill, its traders and schedulers have to jump into the spot market and pay whatever the going price is. For those buying in parts of the Northeast, it’s been reaching new highs.

While the price utilities pay to deliver natural gas to New York City and New Jersey has been somewhat below $6 for most of the year, it recently spiked to $120
Data: Bloomberg

“I’ve never seen anything like this,” says John Scarlata, vice president of gas supply at PSEG Power, a subsidiary of the New Jersey-based Public Service Enterprise Group. PSEG Power started running low on the feedstock it needs to run the handful of natural gas-fired power plants it operates in New Jersey. “For those units, we have been buying some of the higher-cost gas,” says Scarlata. “The prices are just unbelievable.”

That means that on the other side of the trade, lots of money is being made. “Traders with gas to sell are making a killing, and the utilities they’re selling to are getting destroyed,” says Adam Hoffman, a natural gas trader and the managing member of the Mada Group, an energy trading firm in Houston. Hoffman says traders and schedulers who buy for utilities and power plants enter the spot market at a significant disadvantage during times like these because they have to buy, no matter the price. The alternative is to run out of gas, leaving customers unable to heat their homes or turn on the lights.

“Given their obligations, prices absolutely could’ve been higher,” says Hoffman. The sticker shock may have been particularly acute for some traders because natural gas prices have been so low for the last few years. They’re simply not used to trading a product with any sort of volatility. But all it took was for one utility to show what it was willing to pay for prices to take off. “Once one of these guys showed his hand, then the real traders figured it out,” says Hoffman.

At the heart of this trading floor fist fight is a crucial pipeline bottleneck that’s keeping consumers in the Northeast from sharing in the full benefits of cheap, abundant supplies of natural gas just a few hundred miles away. There simply are not enough pipelines connecting supply to demand. And even though the wells in Pennsylvania are practically in the backyard of major cities in the Northeast and mid-Atlantic, pipeline companies are still working to connect the last few miles. Those are the most crucial miles—and explain why, in many cases, it’s cheaper to bring natural gas all the way from Texas or the Gulf Coast to the Northeast.

In November a new pipeline started bringing cheap natural gas from the Marcellus into Manhattan. That hasn’t lowered prices as much as a lot of people anticipated. “Everyone of us who supposedly knows what we’re doing predicted [prices in the Northeast] would crumble,” says PSEG’s Scarlata. They haven’t. Despite an additional  year of increased natural gas production in the U.S, the problem has gotten worse. As natural gas production has risen, the share of power generated from it has nearly doubled over the past decade. Yet the capacity to push it into big demand centers remains constrained.

The share of U.S. electricity generated from natural gas has more than doubled since 2000
Source: U.S. Energy Information Administration

The problem is perhaps most severe in New England, where reliance on natural gas for power generation has jumped from 30 percent to 52 percent since 2001, with not a single new pipeline built to bring additional supplies of gas to the region. As a result, electricity prices in New England have soared with plunging temperatures. That’s not a new phenomenon, but price spikes are getting sharper and more frequent, says Steven Clarke, assistant secretary for energy in Massachusetts. “They’ve grown about tenfold,” says Clarke. “It’s a real double-whammy.”

New England’s governors are rushing to act, calling for an electricity tariff to pay for added natural gas pipelines—a job that’s usually left to the pipeline companies. And while new pipelines are in the works, “We haven’t seen those investments keeping up with demand,” says Clarke. “So we felt that we needed to take action to avoid the crisis that’s coming down the pike.”

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