The New England energy market challenges and how they impact your energy purchasing plan

New England is in a unique and challenging position when it comes to energy. It sits at a superfecta of bullish conditions that put pressure on supply and prices and impact energy reliability. Notably:

• an electricity generation fleet that is highly dependent on natural gas
• pipeline constraints that make it difficult to move adequate amounts of natural gas to meet peak winter demand for both gas heating and power generation
• supplies of domestic liquified natural gas (LNG) — a backup for New England — going to Europe because it’s more financially advantageous for producers to sell it there

As a result, energy prices for both power and natural gas have hit historical highs not seen in over a decade. And additional regulatory action has resulted in increased costs for energy supply, beyond just the surging commodity prices. Here’s a deeper look at the factors impacting the market and some solutions to consider for your energy strategy.

Energy reliability has been a significant concern in the region for some time due to the challenges of storing or procuring the fuel needed to run power plants. According to the New England Independent System Operator (ISO-NE), which operates the six-state power grid, the region’s fuel security risks have been evident since a 2004 cold snap. During that freeze, more than 6,000 MW of natural gas-fired generation was unavailable, much of it due to lack of fuel, pushing the electricity system close to its limits.

In 2000, oil- and coal-fired power plants, whose fuel is located on-site, produced 40% of New England’s electricity, while natural gas produced 15%. Starting in 2009, with the boom in domestic shale gas production and falling natural gas prices, gas-fired plants became a more economic option to meet demand first. By 2016, natural gas generation had risen to 49%, while fossil fuels, like coal and oil, dropped to 3% of annual electricity generation.

Today, with a generation mix that is highly dependent on natural gas, coupled with the retirement/planned retirement of coal, oil and nuclear plants, fuel security issues are even more of a concern. In addition, during the winter months, fuel for nearly half the region’s power generation capacity may be needed for heating, according to ISO-NE forecasts.

There are several reasons why the amount of natural gas needed to meet heating and electricity generation demand could fall short:

• The capacity of the region’s natural gas infrastructure is not always adequate to deliver all the gas needed during the winter. The pipeline system within New England is relatively small, and its access to the rest of the North American pipeline network is limited. In fact, during certain peak timeframes this winter in certain areas, retail energy suppliers like NRG are unable to source natural gas to serve their customers. In cases like this, local gas distribution companies (LDCs) are positioned to have contingency plans to address natural gas capacity for these customers, but this scenario illustrates the constraints the region faces.
• Deliveries of LNG, which can help supplement the gap in pipeline supply, can be interrupted or impeded due to weather. Fuel for oil-fired generation units faces the same issue because it is also delivered to the region via tankers, barges and/or trucks.
  
• LNG supplies may go elsewhere. With geopolitical events in Europe causing supply shortfalls there, LNG producers can now make more selling LNG to European nations than selling it in the U.S. And, because of the Merchant Marine Act of 1920, domestically-produced LNG for export cannot be shipped from U.S. ports in the Gulf of Mexico to New England.

Although natural gas heating demand takes priority over electricity generation, there are still areas in New England where natural gas supply to retail customers is constrained, and retail energy suppliers like NRG are unable to source natural gas to serve their customers during certain peak timeframes. In cases like this, local gas distribution companies (LDCs) are positioned to have contingency plans to address natural gas capacity for these customers, but this scenario further illustrates the constraints the region faces in terms of natural gas supply.

The ISO-NE has conducted a series of studies to help understand and prepare for fuel security in the region. These studies consider all the factors impacting supply and demand in the region and identify ways in which ISO-NE can ensure reliable power supply during the winter peaks. These studies resulted in ISO-NE’s Fuel Security Program.

The first part of the Fuel Security Program addresses the retirement of several power generation stations in the Boston area. The ISO-NE moved to retain the units for an additional two years beyond their intended retirement in 2022, in an effort to give the region time to implement reliability solutions.  The costs to keep these generation units running beyond their scheduled retirement, called Reliability Must Run (RMR), are socialized among New England energy consumers from June 1, 2022 to May 30, 2024.

The second part of the Fuel Security Program is the Inventoried Energy Program (IEP), a short-term interim measure approved by the Federal Energy Regulatory Commission (FERC) to cover the winters of 2023–24 and 2024–25. This program will compensate market participants for maintaining inventoried alternative fuel supplies when winter energy security is most compromised.

You may remember Winter Reliability Programs from years past, which aimed to solve the same issue. In the absence of investment in the fuel supply infrastructure, the program provided economic incentives for generators to physically store sufficient quantities of oil and LNG, along with demand response resources, during the winters of 2013 through 2018. Like the Winter Reliability Program, costs to compensate IEP resources for maintaining inventoried fuel supplies will be socialized among energy consumers in New England. This will result in additional charges for electricity supply for all New England energy consumers.

Every business is different in their energy usage and their tolerance for risk. Instead of settling for a one-size-fits-all strategy, there’s no better time to consider a customized approach. A hedging strategy with flexibility, term options, and variations in how the costs associated with your unique energy supply demands are configured could help lessen the impact of high energy prices on your business. Unlike the local utility company, a retail energy supplier can craft flexible contract structures and products and pricing options across variable terms — options that aren’t available through utility standard service offers.

Some energy purchasing options in New England include:

• a mix of hedged and unhedged consumption or block purchases
• various term lengths that may help smooth out higher-priced periods
• options for how the non-commodity costs associated with your energy supply are treated (i.e. are you paying a premium to lock them in or are they passed through at cost?)

In particular and related to the Fuel Security Program costs, NRG offers a product option that allows you to lock in an estimate of the Fuel Security costs at contract execution. Because actual IEP costs will not be determined until after the winter season, once settlements are available, NRG will provide a net credit or charge.

This approach provides a distinct level of transparency and allows you to hedge the costs associated with the program and pay them over the term of your contract, without paying a premium to lock these costs in from the start. Once settlement costs are available, you’ll either be charged or credited for the difference between what you paid and the actual costs. This ensures you never pay more or less than what the actual program costs are.

Don’t leave your energy strategy out in the cold this winter. Contact one of our New England energy experts today to discover an energy purchasing approach suited to meet the unique needs of your business amidst the challenges of the market.

* Additional sources:

https://www.iso-ne.com/static-assets/documents/2018/01/20180117_operational_fuel-security_analysis.pdf

https://www.iso-ne.com/about/what-we-do/in-depth/efforts-to-address-fuel-security-in-new-england