Navigating the Volatile Energy Market
Considerations to minimize your future costs
By Tom Guerra
Developments this past winter had a major impact on the gas and electricity markets in Connecticut. Severe weather and natural gas transportation costs created volatile market conditions, driving gas and electricity prices higher and causing uncertainty for consumers. Many market analysts believe that the effects of these factors could have implications for years to come.
Record-setting cold this winter significantly heightened demand for natural gas across the country, particularly in the Northeast. In addition to increased consumption by commercial and residential users, electricity generation plants that use natural gas as a primary fuel source burned more gas to keep up with increased electricity requirements.
Greater demand also caused the pipelines bringing the gas into our region to become constrained, and depleted natural gas storage levels to a nine-year low. How quickly that gas can be replenished to levels necessary to meet rising demand is a question adding to market uncertainty.
Transportation (Pipeline) Costs
Despite the tremendous production of natural gas from the nearby Marcellus shale, our capacity to benefit from this new source is limited by New England’s insufficient pipeline infrastructure.
That constraint: combined with weather-driven demand: substantially increased the transportation costs associated with natural gas pipelines, dramatically elevating gas prices in Connecticut over the winter. Expectations are that these higher costs will be with us until at least 2017, when additional pipeline infrastructure is completed.
Although natural gas production continues to rise, so does demand. While coal still fuels most electricity generation plants in the U.S., over half of New England’s electricity generation plants rely on natural gas as their fuel source.
As more coal and nuclear plants are retired and replaced by gas turbines, demand for natural gas will continue to rise, and electricity prices will increasingly reflect any volatility in the gas market. Experts predict that in 20 years, most of the nation’s electricity generation will be fueled by natural gas. That, along with other factors: including an expanding economy and increased exports of liquid natural gas: is expected to contribute to rising natural gas prices in the future.
Many experts agree that market volatility will continue until stores of natural gas are replenished.
If you are in a natural gas contract with a third-party supplier and have yet to lock in the commodity component (the price of the natural gas itself, as opposed to the transportation cost), this does not appear to be an advantageous time to do so. You may, therefore, want to continue floating the commodity price until the market presents a more favorable opportunity.
Electricity customers in fixed price contracts with third-party suppliers have been shielded from recent market volatility. In addition, customers supplied by utilities have also found temporary relief, as current utility rates are also fixed, but only until June 2014.
As you begin to think about your next electricity contract, be aware that many industry analysts believe there is value inherent in longer-term contracts, because the 2016 and 2017 rates have been formulated with the proposed pipeline expansions in mind. Since these prices may currently understate true pipeline costs, they might not be available in contracts issued after 2014. Consequently, you may want to consider a longer-term contract (which would provide budget predictability) at your next renewal, despite the fact that you’ll likely be paying more than you are now.
For more information on gas and electricity purchasing, contact any member of the CBIA Energy Connections team:
Jim Bell: 860.244-1978; firstname.lastname@example.org
Bruce Freedman: 860.244.1115; email@example.com
Tom Guerra: 860.244.1160; firstname.lastname@example.org
Bill Walsh: 860.244.1942; email@example.com
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