Wednesday, January 22, 2014

Arctic Gold sent power prices to record highs

Day ahead average on peak prices

A record-setting bout of bitter cold weather swept down through the Midwest and across most of the country in early January. The Northeast region reacted with upward spikes in wholesale natural gas and power prices as generators and other customers struggled to procure natural gas supplies. In the Mid-Atlantic region, record-high winter peak demand along with unexpected outages of power plants and natural gas equipment drove peak electricity prices even higher than in New York and New England. The sharp rise in Northeast and Mid-Atlantic natural gas and power demand also spurred record-high natural gas storage withdrawals.

Winter 2013-2014 and 5 year average net storage withdrawals

Last week's widespread, record-breaking cold weather had significant effects across virtually all segments of the U.S. natural gas market. The frigid temperatures led to record highs in demand, storage withdrawals, and prices.

The week ending January 10 posted a record-high net withdrawal of 287 billion cubic feet (Bcf) from underground, natural gas storage facilities. The January 10 withdrawal is the largest for the 20 years for which data exist and the latest in a season already characterized by withdrawals much larger than average. This week's storage withdrawal was the second record-breaking weekly stock draw this season; the withdrawal of 285 Bcf for the week ending December 13 exceeded the previous record of 274 Bcf from January 2008. Cumulative net withdrawals, as of January 10, 2014, exceeded the previous record levels posted during the 2000-2001 heating season. Bentek Energy estimated stock draws hit 57.1 Bcf on January 6, and then 67.9 Bcf the following day. The next-highest draw was 52.9 in February 2011.

High storage withdrawals were expected to meet surging demand for heating from the residential, commercial, and electric power sectors, with analyst estimates, as published by Bloomberg, ranging between 278 and 321 Bcf. The cold weather also impacted natural gas production. Freeze-offs occurred in the parts of the Marcellus Shale in northeastern Pennsylvania and in the Fayetteville Shale in Arkansas, according to Bentek Energy. Dry natural gas production dropped to 61.9 Bcf on January 8, the lowest level since September 2012, and has been gradually increasing since then, reaching nearly 66 Bcf as of January 16.

Net seasonal withdrawals from storage as of January 10- 2000- 2014

In the Northeast, where more than half of homes use natural gas as their primary space-heating fuel, several pipelines issued critical notices and operational flow orders (OFOs) to prevent system imbalances. Additionally, Texas Eastern Pipeline, a major interstate pipeline supplying the Northeast, issued a force majeure (which frees both parties from upholding contractual obligations in the event of extraordinary circumstances) following unplanned maintenance at a compressor station in Pennsylvania.

Natural gas prices in the Northeast spiked to between $30 and $40 higher than the benchmark Henry Hub price. On the Transcontinental Pipeline's Zone 5 line, which serves Mid-Atlantic customers, prices reached $72.43/MMBtu on Monday. Prices in New York and New England also rose far into the double digits, with Transco's Zone 6 delivery point, serving New York City, at $56.59/MMBtu, and the Algonquin Citygate, serving Boston, at $34.14/MMBtu.

The extreme cold temperatures that affected Northeast natural gas markets during the first half of last week arrived earlier in the Midwest, where about 68% of households use natural gas for heating. While it is common for prices to spike in the Northeast during times of high demand, Midwest prices are normally close to Henry Hub prices, as the region does not typically have major supply bottlenecks. Prices at the Chicago Citygate rose to levels almost $10/MMBtu greater than Henry Hub prices on Friday, January 3, as temperatures in the Midwest dipped to levels that prompted the Chicago Zoo to bring its polar bear indoors. Both ANR Pipeline and NGPL, major interstate pipelines that send natural gas to the Midwest, issued OFOs, and many other pipelines in the region issued critical notices that curtailed normal gas-flow scheduling to maintain balance on their systems.

The PJM Interconnection's (PJM's) electric system, which covers the broader Mid-Atlantic region and parts of the Midwest, broke its previous record winter peak demand (136,675 MW in 2007) two times on January 7, hitting a new peak of 141,312 MW. This level was about 7% higher than PJM's forecasted peak.

Day ahead average on peak power prices -Massachusetts 

The extremely cold temperatures, combined with unexpected outages of power plants and a natural gas compressor station in western Pennsylvania, pushed day-ahead, average on-peak power prices up to $268.84/MWh and natural gas spot prices to $33.53/MMBtu. Real-time, hourly prices during January 7-8 reached as high as the $800/MWh range with 15-minute periods of more than $2,000/MWh.

Day ahead average on peak power prices -New York 

Unlike in New York and New England, these price movements went far above prices seen in PJM last winter. PJM relies to a lesser extent on natural gas for power than the Northeast, and the atypical weather and unexpected power plant outages likely played a bigger role in the price spikes than persistent natural gas supply constraints. According to PJM's preliminary report, there were nearly 40,000 MW of forced outages on the evening of January 7 and morning of January 8, far more than encountered during the top six winter peak demand days of the past five years, which saw, at most, about 16,000 MW of forced outages. PJM estimates around 6,000 to 9,000 MW of the January 7-8 outages were due to natural gas curtailments.

Day ahead average on peak power prices -Mid Atlantic- PJM Western Hub 

In response to the extreme weather conditions, the Federal Energy Regulatory Commission (FERC) granted PJM a temporary emergency waiver to allow it to exchange nonpublic information with interstate natural gas pipelines about gas availability for power generators and generation schedules. FERC had ruled in November 2013 to allow interstate natural gas pipeline and electric system operators to share nonpublic operational information to facilitate natural gas and power reliability. However, PJM had not completed implementation of the ruling by the time the January weather hit.

Record cold weather pummeled energy infrastructure across the U.S., prompting gas pipeline operators to reduce flows, fuel terminals to shut loading racks and refineries to scale back production.The cold snap boosted natural gas on the spot market a 17-month high. Temperatures in several cities across the eastern half of the U.S. dropped to record lows, with New York’s Central Park hitting 4 degrees Fahrenheit (minus 16 Celsius) , breaking a mark for the date set in 1896, according to AccuWeather.

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