Who benefits when gas prices spike during a New England freeze?

The stress on New England's natural gas supply for heating and power generation became starkly evident when gas and electricity prices spiked Friday as temperatures dropped below zero and snow blanketed the region.

The spot price for gas sold in New England for delivery Friday was $28 per million British thermal units, according to the Energy Information Administration, a 51 percent increase from a day earlier and a soaring price compared with other parts of the country. As a result, the spot price of electricity in the region rose 26.5 percent, to $237.75 per megawatt-hour, on Friday.

While consumers of electricity in the Northeast are suffering, there's one clear financial winner: the region's merchant natural-gas-powered generators. And it was presaged by energy analysts who had predicted that pipeline constraints and volatile gas prices would, once again, boost the profitability of power companies.

Natural gas is the dominant fuel for power generation in New England and the northern mid-Atlantic, stretching from Maine to New York. The harder it is to ship gas to big-city power plants and energy trading points, the higher the electricity bills.

"Ironically," SNL Energy said this fall, a review of pipeline contracts and capacity "indicates that constrained natural gas markets may create more revenue opportunities for generators than are available when the market is well supplied."


Indeed, EIA reported that the Friday spark spread in New England -- which measures the profitability of a gas-fired electric generator -- was $41.75 per MWh. By contrast, across the nine other U.S. regions tracked by EIA, the spark spreads Friday ranged from $0.00 to $14.49 per MWh.

The price news is a unique and expected consequence of New England's organized power market, ISO-New England Inc., where electric utilities own the wires to distribute electricity and merchant generators own the plants that produce it. But most merchant generators do not hold long-term contracts for firm gas capacity and have to buy it as it becomes available in the spot market.

On the gas side, local distribution companies have "a public service obligation to make sure that people are warm on the coldest day of the year," said Cathy Landry, spokeswoman for the Interstate Natural Gas Association of America. "So they buy all this capacity on the pipeline, this firm capacity, and they release it when they don't need it, which is most days of the year. And then the power generator comes in and they buy the spare capacity at a discount and they're able to run their power generators."

The reliance on spot gas purchases is a significant factor behind EIA data showing New England states ranking among the top 10 in the United States for average retail electricity prices.

Rhode Island led the group at 18.14 cents per kilowatt-hour, followed by Connecticut (17.94 cents per kWh), Massachusetts (17.84 cents per kWh), Vermont (17.29 cents per kWh), New Hampshire (16.12 cents per kWh) and Maine (14.45 cents per kWh). For the U.S., the average retail price is 12.31 cents per kWh.

Steve Piper, associate director with SNL Energy, said the difficulty in getting gas to power generators "is a nagging problem for the region." In the winter, he said, demand for electricity is lower because there's no demand for air conditioning. Most space heating is provided by oil or natural gas.

Still, for electricity generators with newer combined-cycle gas turbines, spiking gas prices lead to a "very healthy [spark] spread."

More gas pipeline capacity has long been among the solutions to the problem of price spikes that benefit some in the energy market while trickling down to consumers through higher electricity bills.

That, at least, is the conclusion of the region's governors, who last month issued a plan to encourage pipeline expansion and new transmission lines (EnergyWire, Jan. 3). The pipeline industry says building up infrastructure requires either state regulators, utilities, the independent systems operator or merchant generators to act as creditworthy counterparties for long-term gas pipeline contracts.

So far, the merchant generators have refused. According to SNL's Piper, it means "structural reforms that incentivize investment in natural gas pipelines to New England may need to be driven on the power market side."

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