WSJ -- New England Risks Winter Blackouts as [Natural] Gas Supplies Tighten ..............................
Oct. 17, 2022
New England Risks Winter Blackouts as Gas Supplies Tighten
Grid officials warn of strain as the region competes with European countries for shipments of liquefied natural gas
By Katherine Blunt and Benoît Morenne
New England power producers are preparing for potential strain on the grid this winter as a surge in natural-gas demand abroad threatens to reduce supplies they need to generate electricity.
New England, which relies on natural-gas imports to bridge winter supply gaps, is now competing with European countries for shipments of liquefied natural gas, following Russia’s halt of most pipeline gas to the continent. Severe cold spells in the Northeast could reduce the amount of gas available to generate electricity as more of it is burned to heat homes.
The region’s power-grid operator, ISO New England Inc., has warned that an extremely cold winter could strain the reliability of the grid and potentially result in the need for rolling blackouts to keep electricity supply and demand in balance. The warning comes as executives and analysts predict power producers could have to pay as much as several times more than last year for gas deliveries if severe weather creates urgent need for spot-market purchases.
“The most challenging aspect of this winter is what’s happening around the world and the extreme volatility in the markets,” said Vamsi Chadalavada, the grid operator’s chief operating officer. “If you are in the commercial sector, at what point do you buy fuel?”
Power producers in New England are limited in their ability to store fuel on site and face challenges in contracting for gas supplies, as most pipeline capacity is reserved by gas utilities serving homes and businesses. Most generators tend to procure only a portion of imports with fixed-price agreements and instead rely on the spot market, where gas prices have been volatile, to fill shortfalls.
“Anybody who is depending on the spot market for their natural-gas supply is probably going to have a pretty significant sticker shock,” said Tanya Bodell, a partner at consulting firm StoneTurn who advises energy companies in New England.
New England has been grappling with fuel-supply challenges for more than a decade because the region has limited pipeline capacity. Imports of LNG can make up more than a third of the region’s natural-gas supply during periods of peak demand, according to the Energy Information Administration. The Jones Act, a law restricting the movement of ships between U.S. ports, makes maritime delivery of domestic supplies nearly impossible, so the region relies on gas produced abroad.
Now, intense competition for LNG cargoes driven by European demand makes securing supply ad hoc a costly proposition. This summer, the European benchmark price for natural gas topped $100 per million British thermal units. Gas prices in New England, by comparison, rarely reach much above $30, said Eugene Kim, a research director at energy consulting firm Wood Mackenzie -- a differential that encourages suppliers to provide gas to Europe rather than New England.
This summer, the governors of New England states sent a letter to U.S. Energy Secretary Jennifer Graholm citing high natural-gas prices as a reason to waive the Jones Act and allow for domestic LNG imports to the region. They also requested more coordination with the federal government to ensure energy reliability and help modernizing New England’s heating-oil reserve.
New England residents are facing some of their largest electricity bills in years and are likely to pay even more this winter because of higher gas prices. Utilities purchase electricity from generators on the wholesale market and recoup those costs from customers.
Thad Hill, chief executive of Calpine Corp., which operates several plants in the region, said he expects fuel supplies this winter to be sufficient but expensive. The circumstances, he said, might warrant the need for the grid operator to implement stronger incentives for power producers to store or contract for firm supplies ahead of winter.
“The goal should be to put in place a market mechanism that’s actually durable for all but the most egregious situations,” he said.
New England’s challenges are becoming more acute as older coal, oil and nuclear-fueled generators shut, leaving gas-fired ones to serve a greater percentage of demand. Since 2013, about 5,200 megawatts of that capacity has retired, according to the New England ISO, an amount equal to roughly a quarter of peak winter demand. Some older plants risk closing faster than they can be replaced by renewable-energy projects, which account for the majority of new capacity proposed for the region.
The changes to the region’s power mix have left it increasingly reliant on imports of gas as well as oil to power the remaining plants, and Russia’s invasion of Ukraine has roiled the global markets for both commodities. Similar to gas, fuel oil is used for home heating and power generation, creating a tight market for the resource on cold days.
The New England ISO expects that the grid can weather a mild-to-moderate winter without significant reliability challenges. However, it has warned that electricity demand could threaten to surge beyond available supply after multiple sustained periods of severely cold weather, which would result in calls for conservation similar to those issued in California in September during a region-wide heat wave.
LS Power Development LLC has been working to prepare its two gas-fired power plants in New England, one of which can run on oil as backup. Nathan Hanson, the company’s senior vice president of energy and commercial management, said the company is filling the one plant’s backup tanks with oil and has an option to procure for the other plant an emergency supply of gas for use during peak demand.
“The grid overall is in a much tighter position,” he said. “If we get a sustained cold period in New England this winter, we’ll be in a very similar position as California was this summer.”
Write to Katherine Blunt at Katherine.Blunt@wsj.com and Benoît Morenne at benoit.morenne@wsj.com
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