Severe U.S. winter leaves questions for gas, power markets

Natural gas pipelines and power utilities across the United States struggled for several weeks to keep lights on and homes warm through the coldest winter in decades, but it may take many months for the cost and the fallout of the so-called "polar vortex" to work through the energy chain.

As sub-freezing temperatures spread in January and February, spot natural gas prices spiked at many gas delivery points in the Midwest, Northeast and New York, pushing wholesale power prices above $100 per megawatt-hour for days at a time.

Customers will soon receive gas and electric bills, reflecting the higher cost of gas in January.

In unregulated power markets, January bills will present a "double whammy," said Nick Akins, chief executive of American Electric Power Co, one of the largest U.S. electric utilities that generates and delivers power to 5 million customers in 11 states.

"The energy price took off and they are going to get a big surprise since they are using more electricity to start with and prices went way up," Akins said.

In regulated markets, utilities may be able to pass on higher fuel costs quickly. Elsewhere, higher winter gas prices may not be seen until utilities seek regulatory approval later this year.

Across the country, the U.S. National Oceanic and Atmospheric Administration said the 2013-2014 winter season so far has been 4 percent colder than normal and 12 percent colder than last year.

While painful, those utility bills represent a sliver of the potential cost and impact of the harsh winter, gas and power industry executives said at the IHS CERAWeek conference in Houston, an annual meeting of global energy leaders.

The stress seen on both the gas and power infrastructure raises questions about fuel diversity, environmental regulation, grid operation and market structure, participants said.

Akins said 89 percent of the nearly 7,200 megawatts of coal-fired generation that AEP expects to retire in the next two years was running during the recent arctic blast.

"You have to think twice about taking capacity out of the market; that's, in effect, is what the (environmental) regulation and the market construct is doing," said Akins.

As the nation increases its reliance on gas for power generation, performance of the natural gas network should be reviewed, Akins said.

"We need to make sure that the underlying gas infrastructure is good if we are going to rely on it," he said.

The cold snap showed that the current gas market, while tested, is much more robust than during previous weather or supply events that pushed gas prices at the Henry Hub above $10 per million British thermal units for extended periods, said the head of a gas industry trade group.

"To see record-setting cold, record-setting demand for gas and daily draws from storage and we only saw (Henry Hub) gas to $6 and quickly recede shows how robust the system is," said Marty Durbin, president of America's Natural Gas Alliance.

In New England, where gas delivery was hampered by constrained pipelines, Durbin said just 1 percent of the trades for 18 billion cubic feet of gas needed on Jan. 7 came at the very high spot market price.

The severe weather showed more investment is needed to move abundant new supplies of shale gas to markets, said Gregory Ebel, president of Spectra Energy Partners

It also showed how such investment can dampen gas volatility, he said, citing a new 12-mile pipeline built by Spectra to supply gas to New York.

The new supply line reduced the premium New York customers paid for gas this winter to 13 percent over the nearby Pennsylvania market, down from a 64-percent premium seen last winter, he said.

"Are we going to get rid of (price) volatility? Probably not," said Ebel.

Lynn Good, chief executive of Duke Energy (DUK), the nation's largest utility with 7 million customers, said many lessons will be learned from the polar vortex.

"I view this as a warning," Good said. "It gives us chance to understand where the gas infrastructure is; to understand the value of very diverse resources and how well they worked. We need to stress the system every once in a while," Good said.

By Eileen O'Grady