4 Ways Natural Gas is Impacting Electricity Prices This Winter

It is a matter of supply and demand. Many electricity generating plants in the north east are reliant upon natural gas. When natural gas supply is lower, electricity costs go up.

The Conservation Law Foundation has done an admirable job of explaining the root causes of recent electricity rate increases across much of Northern New England.  Part of their argument is  that “the real problem isn’t a major deficit of pipeline capacity, but a failure to deal adequately with the increased use of natural gas for power generation.”

Here are 4 (relatively) easy to understand ways in which natural gas is impacting electricity prices.

  1. We now use a lot of natural gas for power generation in New England, which helped modernize the system by moving us away from old, polluting, and inefficient sources like coal and oil. Because of this, and the way the regional grid’s electric market works, natural gas prices now generally set the price for electricity in New England.
  2. Unlike natural gas utilities that supply homes and businesses with gas for heating, which buy gas on long-term “firm” contracts that guarantee access to gas, the companies that own natural gas power plants typically buy cheaper “interruptible” contracts because there isn’t currently a mechanism that allows them to pass-through the additional costs of buying firm supply.
  3. In the winter time, people are often turning on the heat at the same time that they are turning on the lights, so the system experiences high demands on gas for both uses in the mornings and afternoons. These “coincident” demands led to price spikes between 10-42 days in each of the last winters, and retail electric prices are now catching up as the market is expecting a repeat of last winter’s high prices.
  4. Now that natural gas makes up so much of the electricity we use, the volatility of gas prices has a bigger impact on electric prices and leads to higher rates. We have been far too slow in deploying demand-reducing energy efficiency measures in homes and businesses and in increasing the amounts of local renewable energy on the system, both of which would help reduce market prices for electricity and protect us from volatile gas prices.

This information is part of a longer blog article published by the Conservation Law Foundation on October 3, 2014.


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