Figure 7: Natural Gas Spot Prices (Sources: EIA, NGI)
Different locations had slightly different reasons for such outcomes. While the New England situation could be partially explained by pipeline constraints, other places experienced a large supply/demand imbalance that got aggravated by dropping production.
Power utilities dealing with the natural gas shortage, had to switch to the diesel and gasoline-fired power production, which climbed above five-year seasonal highs. New England was relying on fuel oil for a remarkable 33% of its power supply. Those were not the only losses: utilities which were forced to run oil-fired generators and increased coal plant production, also lost their renewable certificates opportunities. The situation was moving from bad to worse with leaving no winners on the field.
There are two major layers to the conundrum: physical (infrastructure) and financial (market prices). Failing infrastructure created impediments to the supply deliveries thus distorting the supply – demand balance and contributing immensely to the price spikes.
Question: Why does the industry choose to accept the status quo and avoid investing in the existing infrastructure, which is apparently not built to withstand severe weather?
Our humble guess: It is likely because the economic analysis shows that the cost of managing damages from these critical events is lower than upgrading/rebuilding the infrastructure.
In the aftermath of such an expensive event, we decided to look further into the matter. In Part II, we review data from the previous years' weather events in order to establish whether the historic patterns exist with supply and demand behaving in the similar manner during cold snaps.