Surging coal prices have continued to prompt generators to displace some coal used for power generation with natural gas, and gas demand is again expected to jump this winter, which could pose some supply restraints, the Federal Energy Regulatory Commission (FERC) said in its Winter 2011-2012 Energy Market Assessment.

FERC staff said natural gas demand for power generation in the U.S. jumped 3.6% through Oct. 14, compared to last year, driven by high summer power demand. Low gas prices have prompted generators, particularly in the East, to use more gas instead of coal. “In 2011, the central Appalachian coal price is 21% higher than in 2010, and Powder River coal is up 7%,” staff said.

But this increased reliance on gas-fired power generation for the peak winter months—from January through March—could pose a strain on the pipeline delivery system and lead to fuel supply restrictions on natural gas-fired units as regional gas pipelines prioritize deliveries to customers holding firm transportation rights. This could lead to price spikes, particularly in the Northeast, where generation demand on peak days could coincide with heating load demand, FERC said.

The federal regulatory agency said, however, that market conditions going into the winter are “generally positive.”

Forward winter prices were generally mixed compared to last year. In the Northeast, prices are higher; the Massachusetts Hub has the largest increase, up 31%; and New York City is 29% above last year’s price, reflecting the outlook for local natural gas prices. “This is important because gas is typically the marginal, or price setting, fuel in this region. Unlike the Henry Hub in Louisiana, which is slightly down, Northeast gas prices are, as previously indicated, significantly higher than last year.”

Forward winter prices are also higher for MISO and PJM, with the Cinergy Hub up 17% and the PJM Western Hub up 16%. “These increases may reflect higher demand from industrial power customers, which at the end of the second quarter was 2.5% higher than in 2010,” FERC said. “In addition, the weather forecast from both NOAA and AccuWeather call for colder than average weather for the Great Lakes, the Midwest, and northern plain states, which may also be influencing the forward electric prices. Despite the increase from last year, prices for this winter are at the same level as 2010 winter prices, and are significantly below 2009 winter levels.”

In the West, prices are generally unchanged, except for the Mid-Columbia Hub, which is 11% lower than last year. “Additionally, NOAA is forecasting above average precipitation in the Northwest this winter, which could have a positive effect on hydroelectric production,” FERC said.

Power demand has grown since the 2009 recession. Industrial electric use (which makes up 25% to 30% of total consumption) increased each month of 2010 and so far in 2011, but the numbers are still lower than for industrial consumption before the recession, FERC said.

Staff also reported that progress was being made on FERC-issued recommendations to reduce winter reliability problems, such as was experienced in February 2011 by the Southwest, when grid operators were forced to initiate rolling blackouts after a shortage of nearly 6,000 MW occurred.
 
“On the electric side, the Salt River Project in Arizona has made infrastructure and procedural improvements to better handle cold weather events,” FERC said. “Staff of the New Mexico Public Utilities Commission is preparing a report on the outages to include recommendations for weatherization and other infrastructure improvements. Under new state legislation, the Texas Public Utility Commission has directed its electric utilities to update their emergency plans and recommend improvements.”

Sources: POWERnews, FERC