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August 6, 2012

Booming demand for natural gas pushes up prices

Gordon van Welie, president and chief executive, ISO New England

The commodity price of natural gas leaped more than 70 percent this summer, firing a warning shot throughout the region that New England — and Connecticut, in particular — is over-relying on one fuel source.

Natural gas is the trendy pick for electricity generation and home heating in the Northeast as the fuel has lower prices, fewer emissions, and a larger domestic supply than coal or oil.

Power plants using natural gas comprise 51 percent of the existing generation in New England. Connecticut's three main natural gas utilities — Yankee Gas, Southern Connecticut Gas, and Connecticut Natural Gas — are pushing for a $2.5 billion build-out of the home heating distribution system, as 52 percent of the state still uses fuel oil for heat.

In addition, U.S. Rep. John Larson (D-CT) is pushing for a national build-up of a natural gas transportation system, so cars and trucks run on natural gas, too.

All of that focus on natural gas may be too much of a good thing.

“Being dependent on just one fuel has a variety of issues and concerns,” said Marcia Blomberg, spokeswoman for regional electric grid administrator ISO New England.

Typically, the commodity price of natural gas spikes only in the winter, as demand increases for home heating throughout the nation. As more power generators switch to natural gas, the price increases in the summer, too, as the demand for electricity rises, particularly when the weather is hot.

“There has been a lot of weather pushing up demand in recent months,” said Katie Teller, operations research analyst for the U.S. Energy Information Administration.

The national commodity price of natural gas — priced at a central point in Louisiana — reached $3.20 per million British thermal units, or Btu, by the end of July, a 74 percent increase from April. The increase came from increased summer demand and decreased supply.

In Connecticut, the commodity cost of natural gas coming into the state was $5.23 per million Btu in May, a 26 percent increase from the previous month. EIA reports state prices on a three-month delay. That figure includes transmission costs.

The demand for natural gas nationwide and in Connecticut increased drastically over the last couple of years as new technology has enabled tapping of gas trapped in shale rock formations in the Midwest and South. The large supply caused prices to drop 66 percent in the past four years, and suddenly the rush was on to increase natural gas usage, particularly because it emits 45 percent fewer greenhouse gases than coal and 30 percent fewer than petroleum.

“We are at historic lows for natural gas prices. Those historic lows cannot be maintained,” said Lee Hoffman, attorney at Hartford law firm Pullman & Comley and one of Connecticut Gov. Dannel Malloy's advisors on energy policy.

Commodity prices will increase as production levels off in the coming years, Teller said. In 2011, the supply and production of natural gas increased 8 percent. This year, it is expected to increase 5 percent. Next year, production will remain flat or increase 1 percent, according to EIA.

As production is leveling off, demand is increasing thanks to all the new electric generation and home heating usage, Teller said.

“This year, we saw increases in both supply and demand,” Teller said. “In 2013, we forecast increases in total consumption while production remains flat.”

As more than half of New England's power now comes from natural gas, the price of the commodity dictates the price of electricity every day, leaving power costs at the mercy of natural gas price spikes.

Over-reliance is the main issue ISO New England is addressing in its strategic planning initiative. ISO President and Chief Executive Gordon van Welie said the problem not only creates cost concerns but reliability issues as well — where there might not be enough power to meet demand.

In addition to 51 percent of the existing generation coming from natural gas, 55 percent of the proposed new generation in New England will come from natural gas. The over-reliance only will increase, as about 1,000 megawatts of coal- and oil-fired power plants retire because of stricter regulations on emissions coming from the U.S. Environmental Protection Agency, said Blomberg.

“It has been growing, and it appears it could continue to grow,” Blomberg said.

Most natural gas-fired power generators in New England have interruptible contracts with natural gas supply companies — meaning in cases of a natural gas shortage, the power generators might not get the fuel they need to create electricity, Blomberg said.

ISO is considering a number of short- and long-term measures to address natural gas over-reliance, including letting generators know further in advance if they need to run to meet power demand, working with the natural gas supply industry to know when supplies are short, and offering incentives for dual-fuel generators to store their alternative fuel on site.

“We can't simply shut off all of our oil back-ups and forgo oil or coal for that matter,” Hoffman said.

The Connecticut Department of Energy & Environmental Protection is studying natural gas over-reliance as the agency drafts its first comprehensive energy strategy, expected in September.

On the home heating site, the price increase and supply concerns aren't stopping Yankee Gas from pursuing an aggressive expansion of its system.

“In the short to near term, I don't think we have a capacity problem,” said Rodney Powell, president and chief operating officer for Yankee Gas.

Eventually, the region will need added pipeline capacity to meet the anticipated demand, Powell said, but that doesn't need to slow conversions from fuel oil now.

Even if prices increase drastically, natural gas still will be cheaper than fuel oil, Powell said.

Right now, businesses and homeowners switching from fuel oil to natural gas can cut their energy supply bill by roughly half. Even if those savings are reduced by increased natural gas prices — and the price of oil remains steady — converting still makes economic sense, Powell said.

Even with increased prices, natural gas still offers environmental advantages over fuel oil, Powell said.

“From a planning perspective, I don't see this as having any impact,” Powell said.

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