Fitch: Recent cold snap underscores danger of gas over-reliance

January 28, 2014 10:07 AM Eastern Standard Time

NEW YORK--(BUSINESS WIRE)--The recent cold spell in the northeastern U.S. underscores the vulnerability of the power sector's natural gas supply during extreme cold weather conditions, according to Fitch Ratings. The frequency of disruptions and price spikes will likely increase in the future, particularly during periods of extreme winter weather as competing natural gas space heating demand may take precedence over natural gas as a source of fuel for electricity generation.

On-peak wholesale power prices rose to as high as $765/MWh in PJM Interconnection LLC (PJM) operated wholesale electricity markets and $510/MWh in New York as natural gas prices and electricity demand soared. PJM reported that about 4000MW of 9,000MW of forced plant outages during the polar vortex weather event were due to unavailability of natural gas. New England faced natural gas shortages for the second winter in a row.

Unlike coal-fired power plants and nuclear power generation fleet, natural gas-fired generating plants rely on continuous natural gas supply through a mosaic of sources. Coal-fired power plants usually have two to three months of fuel supplies stored on site, while to maintain efficient reactor performance, about one-third of the spent nuclear fuel is replaced every 12 to 18 months. Hence, even a long-term nuclear fuel supply interruption is of a little consequence for electricity generation in the short-to-mid-term.

Falling natural gas prices supported by plentiful supply and a clean-fuel profile under the existing U.S. environmental regulations to control air polluting emissions has turned natural gas as a preferred fuel for electricity generation. Natural gas-fired power plants are also critical in supporting intermittent renewable energy resources, i.e. wind and solar.

In the PJM operated electricity wholesale market, natural gas fired electricity generation capacity is expected to grow from about 25% of the installed megawatt capacity to about 29% of installed capacity by 2016. In 2012, natural gas was fuel on the margin in California, Texas, New England, and New York where at least 40% of electricity was generated from natural gas-fired power generation facilities. For the U.S. as a whole, natural-gas fired generation capacity will grow 10% by 2016 from 2012 levels, based on Fitch's estimation of the planned developments.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.