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New England’s Winter Price Spikes Subdued by ISO-NE Rules and LNG Imports

March 6, 2019 | Warren Waite

Winter time in New England is well known not only for celebrating the latest Patriots Super Bowl victory, but also for notorious natural gas demand spikes, supply constraints, and price blowouts. Winter 2018/19 is no different, or is it?

In this issue of Get the Point, we will look at the region’s activity this winter and investigate why some surprising events have occurred, and why other events that may have been expected have not.

Demand registers strong this winter

From a broad-brush perspective, New England gas consumption this winter has averaged 3.4 billion cubic feet per day (Bcf/d) from November 1, 2018 through February 28, 2019. This is the second-highest average winter-to-date demand on record, falling short of the record by a mere 69 million cubic feet per day (MMcf/d), or about 2%.

But gas demand in New England has been strong for the past five years, as the region has become increasingly reliant on natural gas. New England’s gas consumption this winter has been only 56 MMcf/d stronger than last winter and just 0.2 Bcf/d above prior five-year average. From a daily perspective, New England gas demand reached new daily all-time highs on 31 of the first 120 days of this winter. In the same period last winter, New England achieved new daily high-water marks on 36 occasions.

If March is colder than normal, as weather forecasts currently predict, then New England demand likely will reach record-setting seasonal consumption levels.

If demand is trending at or near record levels, then New England gas prices must be as well, right? Not so fast.

November–February daily cash prices at Algonquin City-Gates—an indicator of market conditions in Boston, the largest demand center in New England—averaged $5.83/MMBtu. This is $2.57/MMBtu below both the corresponding period of last winter and the prior five-year average, according to OPIS pricing data. From a daily perspective, this winter’s prices have reached new highs only eight times, compared with 23 times last winter.

On select days, price spikes at other regional price hubs such as Iroquois Gas Transmission Zone 2 and Dracut (Massachusetts) have surpassed those at Algonquin City-Gates, highlighting the lack of supply in other parts of New England during peak demand periods.

New rules at ISO New England

New England prices are particularly influenced during the winter by the extent to which regional gas-fired power plants can access supply. Complicating the matter is an evolving generation mix under the control of ISO–New England (ISO-NE), the region’s coordinator of power production and distribution.

As New England’s power generators have become increasingly reliant on natural gas in the last decade, ISO-NE has made it a priority to address the “just-in-time” nature of gas deliveries, which contrasts to the way that coal or fuel oil can be stored onsite in large volumes to deal with spiking demand. In the past few years, the ISO has conducted extensive risk analysis and implemented market-based winter reliability programs to encourage power producers to lock in more guaranteed supply for high-demand periods. (For a more complete review of the measures taken in the region, read ISO New England’s State of the Grid: 2019 presentation, click here.)

Preparation in the power market is crucial, and OPIS PointLogic believes that better preparation has been a key reason why natural gas prices this winter have not spiked to the highs of prior winters. “Last winter demonstrated just how much the weather can impact power system operations, not just in terms of consumer demand for electricity, but in the ability of generators to access fuel,” said Peter Brandien, ISO-NE vice president for system operations, in November. “The ISO has learned lessons from this experience and made near-term improvements to help address these energy security concerns."

For winter 2018/19, in particular, ISO-NE implemented for the first time its pay-for-performance capacity market rules. The rules provide enhanced incentives, in the form of bonus payments and financial penalties, for resource owners to ensure that their resources are ready and able to meet their obligations to provide energy and reserves or to reduce demand during times of stress on the regional power system.

LNG sendout peaks at the right time

For decades, the regasification of LNG has played an important role in providing additional supply during periods of peaking demand in New England. This winter has been no exception, but LNG sendout to the gas grid appears to have become more responsive than ever to sudden demand spikes, mainly due to the timely arrival of inbound LNG cargoes. This greater responsiveness, together with the reduced appetite of gas-fired power generators to pay up for natural gas, has restrained New England natural gas prices compared with prior winters.

On average, New England LNG sendout this winter is roughly in line with last winter, at 0.2 Bcf/d. However, as the chart above depicts, the LNG sendout throughout January and February 2019 was particularly strong, which likely played an important role in restraining prices during the recent demand spikes.

Based on IHS Markit Waterborne LNG Vessel Traffic data for November–February, deliveries at the handful of terminals in New England and Atlantic Canada totaled 14 vessels and approximately 40 Bcf in total gas equivalent. This is in line with historical levels since the 2015/16 winter, as shown below.

Source:  IHS Markit

The use and timing of these imported cargoes, along with LNG that already was in storage, enabled sendout levels to increase swiftly to meet peaking New England demand while restraining price spikes.

Sendout from Excelerate Energy’s Northeast Gateway offshore floating storage regasification units (FSRU) connects to Algonquin Gas Transmission. Prior to receiving cargoes in December 2018, Northeast Gateway had sporadic activity, with no sendout since 2015. However, the recent cargoes and ensuing sendout from Northeast Gateway timed quite well with New England’s peak demand, with Excelerate reporting record sendout on February 1.

Importance of LNG imports will intensify

OPIS PointLogic sees two additional trends which suggest that imported LNG will need to play an increasingly important role during the winter in future years. First are the ongoing, well-documented challenges that companies face in building gas pipeline transmission capacity to serve New England. It is hard to envision any new substantial pipeline capacity coming online in the next two or three years, which would provide an extra margin of delivery capability.

Second, gas production in the eastern Canadian provinces of Nova Scotia and New Brunswick recently has declined to nearly zero. Historically, this gas moved into the US Lower 48 by pipeline, but as of winter 2018/19, there has been no offshore production from Deep Panuke and Sable Island. Deep Panuke stopped producing in May 2018, and Sable Island ceased operations in December 2018. As a result, pipeline gas entering Maine—which already was inconsistent in winter—has become an even smaller supply source for the New England market. This lack of "local" production also will leave Atlantic Canada almost solely dependent on LNG imports during the winter, particularly through the Canaport LNG terminal in New Brunswick. In fact, Canaport likely will need to serve gas demand in both Atlantic Canada and New England at higher levels than in the past.

What's next?

This winter’s pattern of cold-weather periods and surging demand for natural gas in New England is not unusual. However, the relative stability of prices is unusual.

What has evolved since prior winters is the ability of the gas supply network to deliver more volumes when needed, thereby avoiding the price spikes of winters past, thanks largely to better planning and the adapting use of LNG to meet unforeseen, sporadic needs. The question now is whether and to what extent these market developments will continue in future winters, as the region becomes more reliant on natural gas.

Continue reading "Get the Point" and the full range of IHS Markit and PointLogic publications for updates on New England and other regional natural gas markets.