All eyes have been on prices at the pump. Despite a recent decline, crude oil prices remain at high levels.
But the potential for another gas crisis is quietly taking shape, this one involving not gasoline but the potential for a surge in natural gas prices across the United States this coming winter.
While natural gas prices have recently declined from a very high price point this spring, this is mainly the result of a fire at a key export terminal that effectively trapped gas in the domestic market. Effectively, the drop is deceptive.
But with exports expected to resume full-tilt this winter, surging demand for US natural gas from Europe and other key global markets portends a tight winter market that could drive up both heating and electric bills.
Still, there are steps that both utilities across the country and their customers can take to help blunt the impact of rising costs, from installing more energy efficient heating systems to information sharing by gas and electric companies about price spikes ahead.
And while it’s easy to forget amid the 80, 90 and even 100-degree summer days, the time to act is now, with the start of home heating season in the Northern states rapidly approaching.
Shifting Market Dynamics
After a long period of stable low prices, the US natural gas market is now showing signs of a shift back to conditions of scarcity and volatile high prices.
Natural gas prices very likely would not have dipped in previous weeks – albeit from high levels – were it not for the fire in June that crippled a key Freeport, Texas, terminal that handles roughly 17% of natural gas exports from the US.
Unable to ship their product overseas, US gas producers were forced to sell all that gas on the domestic market.
However, after that initial decline following the Freeport blaze, record summer heat in major markets across the country has already started to exert upward pressure on prices again, as gas-fired electric plants run full tilt.
And that may be a mere taste of the kind of price increases come fall and winter.
With the Freeport plant slated to come back fully in January 2023, surging demand in Europe and other parts of the world is expected to soak up any excess natural gas supply once again in the domestic American market amid a scramble to replace Russian with US gas.
Meanwhile, in another troubling sign for winter prices, there has also been an overall drop in the amount of gas being put into storage.
Even with the outage at the Freeport plant, gas in storage in the lower 48 at the end of July is 9.8% below 2021 inventory and 10.6% below the recent 5 year average, according to the US Energy Information Administration. This is a very troubling trend given only 3 months are left in the injection season.
Staying Ahead of the Curve
To prepare for a potentially rocky winter, there are a number of things utilities on both the gas and electric side can do to both prepare their customers and mitigate the risk to what may be a very volatile winter season.
No one likes a price shock, especially rate payers. But utility companies can cushion the blow and prevent sticker shock by communicating directly with their regulators and customers.
Discussions should begin now with state public utility commissions informing them of the natural gas market forces at work leading up to the coming winter. The utility commissions are helpful in getting the word out to customers and preparing them for the coming winter gas bills. This also provides some degree of protection for utilities in reminding utility commissions of national market conditions that are beyond the control of the utilities.
Direct communication with customers is also very important. That could mean sending out notice now about the potential for volatile winter price hikes, while also following up with monthly updates on the natural gas supply cost situation as winter approaches.
While gas utilities will obviously want to do customer outreach, given they are directly affected by these market trends, electric utilities will also want to explain to their ratepayers that they will likely have to pay more as well given the key role natural gas plays in fueling power plants.
Offering advice on how they might invest in new, greener and more efficient home heating systems or upgrade insulation could provide customers with some concrete ways of staying ahead of the curve.
Utilities should also consider working with their larger commercial and industrial customers to educate them in mitigating price risk by locking in fixed-price contracts.
There are also a number of steps utilities can take internally to batten down the hatches as natural gas prices grow more volatile.
Pipeline replacement and modernization programs designed to reduce the risk of failures, leaks, and methane emissions are now more important than ever before, so reviewing whether the best project management systems are in place is crucial to avoid costly delays.
And electric utility executives should also take a close look at where their own power is coming from and consider hedging natural gas fuel prices to reduce the risk of price volatility if gas generation is part of their generation mix this coming winter.
Utility providers should also look at any and every opportunity to increase the amount of power they receive or generate from renewable sources. In addition to helping their companies meet various state decarbonization mandates, the addition of renewables can help reduce the reliance on electricity produced by natural gas-fired plants.
Be Prepared
Given surging worldwide demand, the volatility of domestic natural gas prices is here to stay, at least through this coming winter.
Demand from countries in Europe and Asia is expected to soak up roughly 13% of natural gas production in the US once Freeport comes back online, up significantly from years past.
Faced with the potential for another surge in natural gas prices this winter, utility companies need to talk to regulators and ratepayers early and often on what utility bills may look like come the winter months.
And utility executives need to take a close look at their own operations. It’s essential to ensure crucial pipeline and grid modernization projects are being managed as efficiently as possible, and that everything possible is being done to boost the amount of electricity generated by renewables and reduce the reliance on natural gas.
To be forewarned is to be forearmed. Steps taken now can help ease some of the short-term cost challenges utilities and their customers face.
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by Ted Lenart, Vice President of Gas Services, PFES
