The changing generation mix and recent extreme weather throughout the U.S. have led the power sector to evaluate and begin making changes to address their increased dependence on natural gas and the integration of renewables, staff at the Federal Energy Regulatory Commission (FERC) said in the 2013 State of the Markets report.

Gas Price Hikes Tamped Down Gas Use for Power

Last year was marked by rising natural gas spot prices and, as a result, increased production from shale gas plays and heightened wholesale power prices, the report released last week said.

In 2013, gas prices at natural gas hubs traded between 30% to 40% higher than the historically low prices of 2012, the staff noted. The Northeast saw the highest prices, seeing occasional spikes into the $20/MMBtu to $30/MMBtu range during high demand periods due to pipeline constraints and low liquefied natural gas imports (LNG). The lowest prices in North America were seen at AECO, in Alberta, which sometimes traded under $2/MMBtu—mostly because Canadian gas producers lost market share to growing U.S. production. Appalachia also occasionally saw prices under $2/MMBtu.

The hike in natural gas prices was driven by a record overall demand for residential and commercial use. However, natural gas demand from power generators fell 10% last year because the increase in gas prices leveled natural gas’ competitiveness with coal as a generation fuel. Coal use for power, on the other hand, rose almost 5% over 2012.

In 2013, the U.S. also saw emerging shifts in pipeline flows across the U.S. as natural gas production from shale displaced conventional sources. A 3.5 Bcf/d increase of Marcellus gas production, for example, displaced natural gas supplies from the Southeast, the Mid-continent, and Canada. Growing demand from gas-fired generation in Mexico, meanwhile, absorbed some Eagle Ford gas production, driving exports up 8% compared to 2012.

Long-term projections for natural gas supplies look fair, FERC staff said. New LNG exports and other natural gas exports to Mexico could add as much as 16 Bcf/d to overall U.S. natural gas demand by 2020. But the “decline of the long-term futures curve shows the market expects long-term supply growth to more than meet the growth in long-term demand,” the report said.

U.S. Power Demand Falls for Third Straight Year

Power spot prices also saw a hike in 2013, even though demand declined slightly, the report noted, mostly in the Northeast (where prices at the Mass Hub rose 54% on natural gas supply constraints) and in the West (where prices at Mid-Columbia rose 66%, stemming from reductions in hydroelectric generation). California’s electricity spot prices—which saw a surge of between 40% and 42% compared to 2012—also reflected the introduction of Cap and Trade compliance, FERC staff said.

National power demand, on the other hand, fell for the third straight year, dropping by 0.1% compared to 2012. This could be attributable to energy efficiency measures and growth in “behind the meter generation” such as rooftop solar, FERC staff said.

Even so, total net generating capacity across the U.S. swelled by about 2 GW in response to “changing fuel economics and federal and state policies,” the report said. “Markets across the country are adjusting to the changing resource mix, addressing both a growing reliance on natural gas for electric generation and the integration of renewable generation.”

Natural gas-fired generation saw the largest net increase of almost 5 GW, while an estimated 3 GW of nuclear and 4 GW of aging coal plants were retired last year. FERC staff noted that this has worried some regional transmission operators, who have “looked to interim measures to keep generators running until transmission or generation alternatives can be developed.”

Utility-scale solar resources also saw a tremendous hike of more than 3 GW—a new record. But wind generation additions were down compared to 2012, even though more than 1 GW of nameplate capacity was added last year.

Examples of measures being implemented to address drastic changes in the resource mix include New England’s winter reliability program to bolster fuel oil inventories at power plants and California’s proposed market changes to encourage renewables to respond to price signals and ensure that sufficient ramp capacity is available.

Other trends highlighted by the report include the changing borders of regional transmission organizations. In 2013, for example, MISO expanded to the Gulf of Mexico as Entergy, Cleco Corp., and other utilities joined its market. Also last year, the East Kentucky Power Cooperative became part of PJM, and CAISO expanded outside California when Nevada’s Valley Electric Association joined the independent system operator.

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)