In its 2012 State of the Markets report, the Federal Energy Regulatory Commission described how the availability of low-cost natural gas drove electricity prices downward last year. However, as power plants, businesses, and homes convert to natural gas for their energy needs, growing competition between heating and electric load for a limited natural gas supply drives prices of both gas and electricity upward during the winter season.
New England's demand for natural gas peaks in the winter, due primarily to heating demand from the residential and commercial sectors. As electric generators have increasingly turned to natural gas as the fuel of choice, total demand for gas has increased correspondingly. In recent years, to meet peak demands for natural gas, New England has relied on imports of liquefied natural gas (LNG), as well as natural gas produced from Canada's offshore Sable Island field. But last year, low domestic natural gas prices led to low imports of LNG and Canadian natural gas. LNG imports hit their lowest level since 2002. Sendout from the with Canaport LNG facility in St. John, New Brunswick, was drastically reduced, as LNG shippers chose to send their cargoes to higher-priced markets in Europe and Asia. As FERC found:
Lack of LNG and natural gas from Canada exacerbated pipeline constraints into New England from the southern supply corridor, including Marcellus Shale natural gas production, as New England relied more heavily on these pipelines for supply. This led to concerns that extreme cold weather could result in some service interruptions, particularly to power generators that generally rely on interruptible pipeline capacity to meet their fuel needs.In particular, during cold snaps, demand from power plants coincides with peak residential and commercial natural gas demand. Despite an unusually warm winter that suppressed residential and commercial load during the first quarter of 2012, demand reached pipeline capacity for part of the winter. As a result, last winter New England consumers paid over a billion dollars more for natural gas and electricity than they would have if adequate pipeline capacity existed.
Unless LNG imports once again become economic, or domestic pipeline constraints are relieved, this situation is likely to repeat itself in New England next winter. As consumers find wider uses for natural gas -- from converting vehicles and the transportation sector to compressed natural gas, to increased access to natural gas for home heating -- the number of days when demand reaches pipeline limits will likely grow. This reality has led states like Maine to stimulate the development of new pipeline capacity by authorizing its Public Utilities Commission to enter into contracts for natural gas capacity. While it may be several years until the constraints can be relieved, other states are likely to follow Maine in addressing the problem.