WESTFIELD – A number of factors are expected to reduce the volatility of winter energy costs and “soften” price hikes which have occurred for both electricity and natural gas the last several years.
Westfield Gas & Electric Department General Manager Dan Howard said winter energy costs in New England will continue to be higher than in other part of the country because of the limited pipeline transmission capabilities.
“While natural gas supplies are plentiful, the delivery infrastructure in the Northeast remain inadequate,” Howard said to member of the Municipal Light Board Wednesday night.
“The demand for natural gas, particularly in the electric generation business, had been relatively flat when the pipelines were built in the 1950,” Howard said. “Gas accounted for about 10 percent of the electrical generation. This began changing about a decade ago and in 2014, roughly half of electric generation was fueled by natural gas.”
The reliance on gas for electrical generation links the cost of the two energy sources, as the delivered price of gas increased, so does the price of electricity.
Howard said that because the Northeast has become more reliant on natural gas for electricity generation new strategies are being put into place by ISO-New England which regulates supply and transmission of electrical power.
ISO-NE can require generation companies, with dual fuel generators, to burn oil during peak natural gas demands. That dual fuel capacity drops the demand for natural gas, lowering the price, and because of the drop in the cost of fuel oil, stabilizes the cost of electrical power.
“Despite the record cold weather we experienced in February 2015, other market factors worked in unison to cap New England delivered gas prices,” Howard said, adding that those factor are still in place for the upcoming winter season.
Howard said the collapse of crude oil prices resulted in stocks selling at half the cost of the previous year, making conversion to fuel oil more feasible.
Another factor is that foreign LNG (liquefied natural gas) prices are tied to the cost of oil, so the drop in crude oil was also reflected in a drop of LNG which “flowed into the New England market, unlike the previous (2014) winter,” Howard said.
A third factor moderating the cost of energy was the steps taken by ISO New England which “provided incentives to oil, gas and dual fuel generators to secure supply in advance of the onset of winter, creating greater supply availability.”
Howard said that historically, electrical generators have purchased fuel, gas or oil, on the spot markets rather than locking in fuel supply, a practice that contributed to the volatility of the energy market as fuel prices peaked and the additional costs were passed on to customers.
The other result of the historical spot market fuel purchases is that it does not provide incentive to the pipeline transmission companies to invest in new infrastructure.
“Pipeline capacity is added only to meet the needs of gas customers requesting primary firm service and who are willing to execute long-term firm transportation contracts that pay for the required capital investment and operating costs,” Howard said. ”Without long term firm commitments and arrangements, (pipeline) projects do not proceed and if they do, permitting and construction often take years.”
