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February 22nd, 2013

High Wholesale Electricity Prices In New England: When Should Consumers Expect Relief?

by Andrew Price, President & COO

Wholesale power prices in New England have been extremely high this winter. Electric commodity prices in the real-time and day-ahead markets are near 10 cents per kWh on average and have exceeded 70 cents per kWh at times. This compares to an average of less than 4 cents per kWh last January and February. The cause of high prices is not a mystery; New England’s heavy dependence on natural gas for power generation is in conflict with the region’s growing demand for natural gas as a heating and process fuel. Coupled with inadequate infrastructure to import natural gas from outside the region and some key outages at New Brunswick Canada natural gas production facilities, the fuel shortage is creating persistently high electricity prices.

To meet both heating and power generation demand, New England is often forced to rely on expensive Liquefied Natural Gas (LNG) imports – if they are available – to fuel natural gas fired power plants. When LNG is not available in sufficient quantities, expensive oil-fired generation must come online. Given the inelastic demand for electricity and natural gas, even outages at small power plants can have a big impact on prices.

Many retail consumers of electricity and natural gas are insulated from these high prices by forward fixed price contracts.  For those that are not hedged, but are purchasing hourly electricity and/or daily natural gas, it is a reminder of the trade-off inherent in accepting more risk in the spot wholesale markets, in exchange for lower average prices over time.

New England power prices, as high as they have been, have been prevented from going even higher by non-natural gas fueled power plants. Unfortunately, many of these are dirty old oil and coal-fired power plants. Most of the year they sit idle; they are uneconomic to run under normal conditions and emit much more pollution per kWh of electricity generated compared to a newer, natural gas fired power plant. The old oil and coal plants could be phased out of service in the near future. There are also several nuclear plants in the region with uncertain futures. Vermont Yankee, Pilgrim and Indian Point (which is in New York but exports into New England) are all older nuclear plants that are facing various political, environmental and economic challenges to continued operation. The rapid growth of renewable capacity - such as wind power – is helping, but is not enough at current penetration levels to alleviate the strain that has been placed on the system this winter.    

When can New England electricity consumers expect price relief? The end of the heating season should bring near term price relief as available natural gas supply is diverted from heating to power generation. Whether this happens next week or in late March depends entirely on the weather. Could we see a repeat of high prices next winter? Much of the New Brunswick natural gas production that has been unavailable or underperforming this winter (Deep Panuke and Sable Island) should be fully operation before the next heating season. Significant new pipeline capacity into New England, however, is not expected until the 2015/2016 winter. Any additional power plant retirements, particularly plants using fuels other than natural gas, may offset some of the expected natural gas production gains in the meantime. Bottom line: it remains to be seen if the additional gas production expected in New Brunswick will be enough to return winter power prices in New England back to historic levels next winter.

(Tags: Wholesale Electricity Prices, New England, Power Generation, LNG, Liquefied Natural Gas, Nuclear, Oil,)

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