New England Winter Power at Risk

As we approach the winter season, regional assessments of grid stability and anticipated market economics continue to make headlines. One region that has garnered more headlines than most is ISO New England (ISO-NE). FERC, along with the CEO of Eversource, has discussed the risk of load shedding should the region experience below-average temperatures. Every winter, cold temperatures stress the region’s predominant fuel, natural gas, which has typically been backfilled by LNG imports and oil-fired generation. Today’s Energy Market Insight will discuss the growing risk around oil inventories and how that affects New England’s ability to balance the power market.

To have an idea of what we may see this winter, it’s important to understand what previous winters have looked like when the region was under operational stress. Last winter, ISO-NE saw a stretch of below-average temperatures that lasted nearly a month. The lines in the graphic below show the proportion of gas being used for power (lower line) and residential/commercial heating (top line). In response to declining temperatures, gas was diverted to heating at the expense of power generation, with power’s share of gas consumption falling about 10%.

For natural gas deliveries to this sector, utilities have firm contracts with pipeline operators in which they can guarantee the delivery of the fuel when it is needed. However, power plant operators under interruptible capacity contracts have no guarantee of delivery when interstate pipelines reach capacity. This creates an inverse relationship where increased residential/commercial gas demand leads to decreases in natural gas-fired generation.

In ISO-NE, natural gas comprises an average of 50% of generation within the winter months; any loss of its contribution is a cause for concern. Fortunately, the region has over 6.6 GW of switchable winter capacity that can use both natural gas and petroleum products as fuel. When natural gas demand rose last winter, so did its price. This incentivized power plants to use fuel oil instead of natural gas, as shown in the graphic below.

Directly correlated to fuel prices, petroleum products stepped in to backfill the generation that was lost from the rising residential/commercial demand on gas. Peaking at over 22% of the daily generation mix, the stability of the grid was strongly dependent upon the ability of oil-fired plants to ramp up. Fuel oil plants are unable to operate often, especially for stretches of several weeks, due to emissions standards imposed at both the federal and state level. While oil generation was able to step in last winter, it’s unclear if that will be a viable option this winter.

Similar to last winter’s cold snap, ISO-NE experienced another stretch of below-average temperatures during the winter of 2017-2018. Oil generation played a similar role then as well, backfilling constrained natural gas generation to ensure grid reliability. However, the 2017-2018 cold snap and last winter’s low temperatures have caused oil plants to deplete over 1.8 million barrels of residual and distillate fuel oil (RFO and DFO), or 32% of the region’s total fuel oil storage capacity at power plants. This has left oil generation capabilities at historic lows. The graphic below shows DFO and RFO inventories (solid lines) measured by their potential generation, while the dashed lines show last winter’s actual generation.

In ISO-NE, DFO is the predominant source for oil generation with over 8.7 GW of plants compatible with the fuel. More recently, DFO stocks have fallen by nearly 800,000 barrels, leaving its generation capabilities at 423 GWh moving into Winter 2022-2023. Should the region experience yet another cold snap, further reliance on the fuel may require in-season replenishments to keep up with last winter’s total utilization of 637 GWh. At current levels, DFO generation can be maintained for a few days. Furthermore, without sufficient replenishments during the winter, or accelerated depletions due to lack of LNG imports, oil generation’s ability to balance the market is at risk.

As we look towards the upcoming winter in the region, weather projections show the likelihood of above-average temperatures. However, if below-average temperatures should sustain, oil plant operators will need to procure additional inventory to ensure their generation can alleviate the effects of increased natural gas heating demand. Be on the lookout for future Energy Market Insights, as BTU Analytics will continue to track the situation in New England as winter sets in.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.