Northeast Electrification Push Amplifies Risks for Gas Generators

Winters are a perennial concern among merchant power generators in the heavily gas-dependent Northeast U.S. because of the risk of supply bottlenecks along the congestion-prone pipeline network during periods of high fuel demand. Newly released forecasts by grid operators that point to a startling acceleration of power demand in the coming winters threatens to worsen the strain on the system, leaving gas-fired generators more exposed to high fuel prices, gas-to-oil switching, and supply shortages.

The culprit behind the surge in winter power demand is the expected deployment of millions of electric vehicles and electric heat pumps from state and federal programs aimed at electrifying the broader economy to meet aggressive climate goals. Such initiatives include New York’s Climate Leadership and Community Protection Act, which sets a goal to reduce emissions to 40% below 1990 levels by 2030.

By the 2028-2029 winter, the deployments are forecast to propel net peak wintertime power consumption in the New York and New England wholesale markets by a startling 14% and 12.6%, respectively, according to the latest outlook published by grid managers New York ISO (NYISO) and ISO New England (ISO-NE). As reflected in the following chart, that’s a stark difference from just a few years ago, when peak winter power demand was expected to stay flat or even decline.

The higher winter power demand poses unique challenges to the Northeast. Even though the Northeast’s dependency on gas-fired power has grown, reaching just over half of the power mix in New York and New England, efforts to add any meaningful pipeline capacity have consistently fallen flat amid opposition from state regulators and environmental groups. Adding to the region’s fuel supply woes is the uncertain future of the Everett LNG terminal, a facility in Massachusetts that serves as a small but important source of gas supplies during extreme weather events.

The high risk of fuel constraints on the Northeast’s natural gas pipeline network has given rise to a dependency on oil-fired generation units during extreme weather, particularly in New England. With fuel stored on-site to circumvent the pipeline bottlenecks, oil-fired units represent a critical source for grid reliability when gas supplies are too expensive or are not accessible. As reflected in the chart below, gas-to-oil switching in ISO-NE was prevalent as recently as December, when Winter Storm Elliott brought freezing temperatures and blizzard conditions to the Atlantic Coast. Congestion on the pipelines, which limited natural gas flows and caused high fuel pricing at the regional hub (reflecting a scarcity of supply), forced a shift in power production away from some natural gas-fired plants to those that run on oil.

Further complicating the picture for the Northeast are planned retirements of additional fossil-fuel plants. In NYISO, 2.5 GW of gas-fired generating capacity has announced retirements. While the magnitude is small in comparison to other ISOs, this represents 8% of the thermal generation on the grid. More announcements are expected given New York’s aggressive climate goals.

Current trajectories put Northeast power grids down a risky path as seasonal peak power demand shifts to the high-stress winter. The region’s fuel supply congestion and retirements of gas plants could drive more reliance on dual-fuel units that are able to run oil to keep the system operating during the colder months. Those generating resources, however important for meeting grid reliability, put states at odds with meeting climate and environmental goals. Furthermore, the economics of gas-fired generators are at risk if plant operators are unable to meet capacity supply obligations. This is especially the case in ISO-NE, where any resource holding capacity contracts can be penalized $3,500/MWh for failing to meet their obligation during energy shortfalls. ISO-NE levied penalties totaling an estimated $39 million on resources that underperformed during Winter Storm Elliott in December.

To mitigate the impact of ever-higher expected winter peaks, Northeast grid operators may have to look to the offshore wind power or improving storage technologies to save the day. The U.S. has ambitious goals for offshore wind, targeting 30 GW of operational capacity by 2030. Leading the charge include states like New York, which has five offshore wind projects in active development, totaling 4,300 MW of capacity, making it the largest offshore wind project pipeline in the nation. 

Follow the link here for more info on how you can access BTU Analytics’ entire suite of energy market research and data, as well as news, pricing, and more, using the FactSet Workstation.

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.