Northeast's Record Natural Gas Prices Due to Pipeline Dearth

A dearth of pipelines has the Northeast paying record prices

Temperatures in New York City hit 7F on Jan. 22, a day after the price to deliver natural gas into the city spiked to a record $123 per thousand cubic feet on the spot market. A hundred miles away in Pennsylvania’s Marcellus Shale, the biggest natural gas field in the U.S., the same amount of gas costs 35 times less.

A lack of pipelines is depriving consumers of the full benefits of low-cost energy. Although the wells in Pennsylvania are practically in the backyard of the Northeast and mid-Atlantic states, pipeline companies are still working to connect the gas fields to the utility pipes beneath towns and cities. Until they do, a lot of gas will continue to get pumped more than 1,000 miles from the Gulf Coast to the Northeast.

The problem is particularly severe in New England, where power plants’ use of natural gas has jumped from 30 percent of electricity produced to 52 percent since 2001, with not a single new pipeline built. As a result, electricity prices are soaring in the region. That’s not unusual for this time of year, but the price spikes are getting sharper and more frequent, says Steven Clarke, assistant secretary for energy in Massachusetts. “They’ve probably grown about tenfold,” he says.

As many as 10 pipeline projects are in the works to deliver an extra 2 billion cubic feet of gas from the Marcellus Shale into the Northeast and mid-Atlantic, according to Bloomberg New Energy Finance. Half that capacity won’t be completed until late 2018, so regional lawmakers are trying to speed the process. “We haven’t seen those investments keeping up with demand,” Clarke says. “So we felt that we needed to take action to avoid the crisis that’s coming down the pike.”

In January, New England’s governors proposed adding a tariff to electricity bills as a way to pay for additional pipelines. Such costs are usually left to the pipeline companies, which charge fees to producers and utilities. The extra money from a tariff could provide an incentive to the pipeline companies to build more quickly, Clarke says. In January, U.S. Energy Secretary Ernest Moniz pledged to make the lack of gas pipelines in New England a priority in the review of the country’s energy system that President Obama has requested. A bill speeding the approval process of gas pipelines passed the House in November.

Most natural gas in the U.S. is bought on a long-term basis using futures or forward contracts. That helps insulate consumers from the full brunt of the price spikes. When demand surges unexpectedly and a utility or a gas-fired power plant has to buy more gas, traders have to jump into one of many regional spot markets, paying the going price for any available gas in the area.

“I’ve never seen anything like this,” says John Scarlata, vice president for gas supply at PSEG Power, which operates gas-fired power plants in New Jersey, New York, and Connecticut. Thanks to long-term contracts with pipeline companies, PSEG Power usually has plenty of gas for its customers. But as low temperatures have pushed up electricity demand, traders have had to buy gas on the spot markets near New York City, where prices have spiked the highest. “I thought last year was bad,” Scarlata says, “but those prices pale in comparison to what we’re seeing this winter.”

Natural gas is used in a lot of manufacturing, from milling paper to making chemicals. Some smaller independent plants buy gas on the spot market rather than pay fees for locking up futures contracts. As prices have shot up, some New England factories have shut down. Others are operating well below capacity. “We’ve had to radically downsize because of these prices,” says Mike Cummings, president of Gorham Paper & Tissue in New Hampshire.

Adam Hoffman, managing member of the Mada Group, an energy trading firm in Houston, says that in these situations, utilities or factories operate at a major disadvantage: If they refuse to pay high spot prices, they might be unable to heat homes or operate assembly lines. Their traders, he adds, are lucky they haven’t paid even more: “Prices absolutely could’ve been higher. Those prices were merciful.”