Despite two major power plant retirements, heating and power generation options for the taxed New England market are expected to improve this winter due to lower oil prices, according to a Morningstar Commodities Research report.
Lower oil prices are allowing power generators to fill their reserve tanks for this coming winter at lower costs with less demand from other buyers. In addition, LNG is expected to be more readily available via pipeline from the Distrigas terminal in Everett, Maine, due to Gaz Metro-GDF Suez’s agreement to deliver up to 1 billion cubic feet per day (Bcf/d) of LNG from Canada to New England LNG storage units.
While last winter the New England market was plagued by limited fuel sources, the outlook for this coming winter is vastly different, according to the report. “We believe fuel competition will increase the elasticity of gas demand this winter and pipeline expansions south of New England will help alleviate fear-buying from New York generators,” Morningstar said.
Along with the lower prices, ISO New England’s Winter Reliability Program will help ensure that the region will be able to clear prices lower than current forward prices this winter through the 1,100-mile Algonquin Pipeline.
The report also stated that some panic buying led to the large price spikes on the spot market this past winter were caused by some companies that failed to hedge their supplies, which is unlikely to occur a second year in a row.
“While the retirement of Vermont Yankee [nuclear power plant] and Salem Harbor [coal-fired power plant] will constrain the gas and power markets this winter in New England, we feel that the 2014-15 Winter Reliability Program is more robust this year and will be more heavily subscribed given the lack of gas available last winter,” the report said.
The investment firm said that this program is also likely to be used more this year as power generators will be reimbursed for any unused oil or LNG in their tanks. This includes any supplies unused after the refilling of their tanks. Already a total of 77 power units have announced their intent to participate in the program, which will have an auction to participate. The program’s goal is to secure 3.5 million barrels of oil and up to 6 Bcf of LNG for the season.
“Although the Winter Reliability Program will compensate oil inventory at $18 per million Btu (/MMBtu), current spot oil prices at NY Harbor are trading around $12.5/MMBtu as of late October because of the recent crash in oil prices. If spot oil prices are trading at a significant discount to the $18/MMBtu inventory compensation level, come winter we think this will add even more downside pressure to Algonquin gas prices, as fuel switching will occur at lower gas prices,” the report said.
Somewhat surprisingly, the biggest price driver wasn’t as much from the New England market as it was from the New York market bidding the price up. Morningstar found that on extreme days when prices were much greater than $30/MMBtu, they were also greater on the TETCO-M3 Pipeline which caused generators from New York City to seek gas supplies from northern points. The firm anticipates this demand to lessen due to Spectra Energy Corp.’s Team 2014 expansion along the TETCO-M3 and Williams Co.’s Inc. Rockaway Lateral Project that will expand the Transco-Z6 system into Brooklyn, N.Y. Both of these projects are set to be completed in November.
Another aspect that portends well for the New England market not facing such harsh gas prices as last winter is that while heating degree days were well above the five-year average, total gas demand was right around the five-year average. According to the report, total average daily gas demand for November-March was only 2.9% greater than the five-year average with the January-February daily demand only 1.7% greater than the five-year average.
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