By Catherine Nisbet, Energy Analyst
As an Energy Analyst for CES’ Analytics Team, I – along with my A-Team colleagues -- rely on the annual Federal Energy Regulatory Commission Winter Assessment to help guide client discussions and recommendations. Our every day is spent analyzing energy market trends, current and future, and to some extent, we anticipate that the FERC Winter Assessment will highlight the story we see unfolding over the year prior to the report’s publication. That said, it’s an invaluable resource – one that helps us better advise our clients. The FERC Winter Assessment provides an overview of key factors that will impact businesses and households during the winter months. Importantly for this 2022-23 winter season, the FERC Winter Assessment informs and provides confirmation of the market volatility that we have seen over the past year and that we have been anticipating for the upcoming winter. In this article, I summarize many of the key take-aways of the FERC Winter Assessment so that our clients and friends can make informed energy management, usage, and budget decisions in the months ahead.
The FERC Winter Assessment: Why It’s Produced Each Year and How Can Businesses Use It to Inform Energy Management, Usage, and Budget Decisions
The Winter Energy Market and Reliability Assessment Report is produced each year in October by the FERC staff. It presents their outlook on energy markets – both electricity and natural gas markets – as well as winter electricity reliability and capacity for the period of December – February of each winter cycle. This report is important to us as energy professionals and all end-users because the winter season can be very expensive due to increased heating demand. Heating demand in the U.S. is largely met by natural gas, so it is critical to understand the factors that will drive up natural gas prices during the upcoming the winter season.
Key Natural Gas, Electricity, and Electricity Reliability Take-Aways: What to Expect
Winter energy markets and reliability, understandably, are a much-discussed topic these days. Based on FERC’s evaluations, here’s what you can expect this winter:
· Natural Gas – Natural gas prices are expected to remain higher than recent years at the major trading hubs across the U.S. While natural gas production growth is expected to outpace domestic demand, net exports, which notably includes exports of liquified natural gas (LNG), are also anticipated to increase. This puts pressure on domestic gas prices, especially in New England where LNG is imported to meet winter natural gas demand. Growth in domestic exports is largely driven by the increased capacity for LNG liquefaction over the past year, as well increased pipeline exports to Mexico. These factors will continue to drive up natural gas prices.
· Electricity – Electricity prices will follow trends seen in domestic natural gas markets because the majority of domestic electricity is generated by natural gas fired power plants, especially in New England. Typically, around 60 percent of New England electricity is generated by natural gas. We can expect electricity prices to remain elevated this winter, driven by high gas prices.
· Electricity Reliability – Electricity reliability is largely impacted by the number of available capacity resources for the winter season. Wholesale electricity markets are expected to see the addition of wind and solar resources and the retirement of more carbon intensive resources, predominantly coal. In total, the U.S. is expected to add 43 gigawatts (GW) of net winter capacity between March of 2022 and February of 2023, of which 63 percent will come from solar and wind. On the flip side, we expect to see 15 GW of net winter capacity retire over that same period. The report finds that there will be enough resources to meet expected demand. In fact, each region is expected to have more capacity resources this winter than winter 2021-22. While we anticipate having adequate resources under normal conditions, extreme weather events may result in abnormally high demand. During these times, ISO-NE may rely on liquid fuel reserves to meet increased heating demand. ISO-NE is preparing for this scenario by conducting weekly surveys of fossil fuel generators to ensure adequate fuel availability.
Natural Gas Futures Pricing and Production, Demand, Inventories, and Exports/Imports: Preparing for The Winter Ahead
Natural gas consumption has increased in the U.S. over the past year, while we have seen quite low production growth. Additionally, lower-than-average inventories and continued growth in exports have put upward pressure on the natural gas market. In addition to these domestic factors, there are international factors that have come into play for this winter. The Russia-Ukraine war has driven up European demand for LNG. This creates more competition for New England and puts constraints on our natural gas resources, resulting in higher prices.
With that in mind, I think our clients should be ready to budget for a much more expensive winter than they have experienced before with regard to gas and electricity prices. There are ways to mitigate these costs and there are options businesses can take, one of which is to talk to a CES Energy Services Advisor if they have not done so already and seek their advice. One of these recommended strategies may be fuel arbitrage, which simply put, allows clients the opportunity on cold days to sell their gas and, in turn, burn liquid fuels which could result in overall savings.
To learn more about fuel arbitrage, I recommend reading “Wondering How Your Business Can Conserve Energy Costs? Fuel Switching or Arbitrage May Be Right for You,” a September CES Insights blog, written by Chris Brook, Director of Natural Gas & Energy Services. Again, Chris or any of our Energy Services Advisors would be happy to discuss winter options with you.
Notable Issues
The FERC assessment covers the following “notable issues” for the winter ahead:
· Coal Supply – The report anticipates coal supply issues due to labor challenges – e.g., mine closures and transportation limits. Coal production has actually increased over the past year, after falling in 2020, but nonetheless, there are transportation and supply issues that will put constraints on regions that still rely on coal for winter capacity. The regions of MISO (Mid-Continent Independent System Operators), Southwest Power Pool (SPP), PJM (Pennsylvania, New Jersey, and Maryland – states where the first utilities joined together), rely on coal for more than 20 percent of their winter net capacity, which is quite a lot. It’s an issue that may not impact New England greatly, but these other more coal dependent regions of the U.S. are thinking about and planning for. As more renewable resources come online across the US, coal supply shortages may become less of a concern.
· Natural Gas Dependence and Winter Electricity Reliability in New England – This topic was touched on a bit earlier in the article, but it’s good to reiterate. New England relies on natural gas to meet the majority of heating and electricity demand. The crux of the issue is that all of this demand is served by limited pipeline capacity. In order to adequately meet peak winter demand, New England imports LNG and, as referenced earlier, there is a large demand for LNG internationally. That competition has driven up gas prices. Since gas is the marginal fuel for electricity in New England, electricity market prices are elevated as well.
· Natural Gas Pipeline Outages and Changes in Southern California and the Desert Southwest, and California – Natural gas supplies may be reduced in Southern California due to a force majeure that has reduced pipeline capacity of El Paso Natural Gas, which is one of the largest interstate pipelines between the Permian basin and California.
· Winter Preparedness Based on the Joint Inquiry Report Recommendations – The Joint Inquiry Report was produced after Winter Storm Uri (2021), a catastrophic weather event with major outages. The point to highlight here is that each region’s independent system operator has conducted assessments and has plans in place to try to mitigate the impact of severe storms, should they occur. One step that ISO-New England has taken is the delayed retirement of the Mystic 8 & 9 Units. Mystic 8&9 are electric generators fueled by LNG, and therefore not dependent on the region’s limited natural gas pipeline import capacity. That was accomplished through a cost-of-service agreement, which is an added cost to ensure these units will stay online. This cost will be passed on to customers via their electricity bill. ISO-New England also administers demand response “pay for performance” programs, which incentivize curtailment during periods of high demand. To learn more about CES’ Self-Help/Demand Response program, reference “Predicting the Peak,” a CES Insights blog written by Zack Hallock, Senior Energy Services Advisor or watch Zack’s video on the topic titled CES Self-Help: Answering Peak Day with Demand Response,” which can found on the CES YouTube Channel or on the Competitive Energy Services’ website.
How FERC Sees the Winter of 2022-23 Unfolding and How It Will Impact Energy Prices
The National Oceanic and Atmospheric Administration (NOA) is forecasting a mild winter for most of the U.S., relative to the climate norm during the past 30 years, with the exception of the Northwest and West North Central regions, which each have a higher probability of lower-than-average temperatures. Although above average temps imply lower demand for electricity and natural gas, it is important to note that severe cold weather events may still occur during an above average winter. Periods of extreme cold can disrupt anticipated usage patterns and energy costs. To learn more about anticipated winter weather patterns for the upcoming winter and the impact on energy prices, I recommend reading “Winter Weather Patterns, Europe’s Limited Gas Supply, Market Volatility, and the Impact on Energy Prices: What to Expect This Cold-Weather Season,” a CES Insights blog co-written by Max Webb, Managing Director of Pricing and Zack Hallock, Senior Energy Services Advisor.
Photo by Darius Cotoi