When you invest in an energy MLP, you often think you understand the risks, or the factors that affect your investment. But often, you’re wrong, or at least I am. There are just so many variables that you keep learning more. That doesn't stop you from making mistakes; you just make new ones.
OK, so today’s NY Times has an article on the cost of electricity in New England. In New England, 52% of electricity comes from nat gas-fired plants. There’s a bunch of nuclear, probably some hydroelectric, some oil-fired, and not much coal and the trend is to nat gas. The article lists a bunch of coal-fired and oil-fired plants that have closed in recent years. So what’s the problem? Nat gas is extremely cheap and plentiful, right?
Not exactly. Once again, it’s a question of where the need for the nat gas is, and whether the cheap nat gas can get there. So when we have a cold spell like recently (I’m in NY, but the article throws us (specifically Long Island, where I live) in with New England, the need for nat gas spikes and so does the price. The article states: “Normally, a megawatt-hour costs $30 to $50, and an MMBtu less than $4. But not lately. (They explain that a megawatt hour is enough electricity to run a large suburban house for a month.)
The problem began late last year. During a cold snap around Thanksgiving, electricity prices in New England shot up to the highest in the country: $103.20 per megawatt-hour and $12.37 per MMBtu on Nov. 27.
On Jan. 24, the cost of an MMBtu of natural gas at Algonquin Citygate, a spot near Boston where gas is traded, rose to $31.20, pushing the price of a megawatt-hour over $200. Constellation Energy, which operates plants in the region, attributed the jump to temperatures 15 to 20 degrees below average.
A megawatt-hour cost about $150 early this month, according to weekly reports from ISO New England, the independent operator that maintains the region’s electricity market. A year ago, the price was around $30."
I don’t want to make this post any longer than necessary, and by now you’re asking “WTH does any of this have to do with NRP?” Well, the article says: “The American Public Power Association has warned since 2010 that demand is outpacing the delivery capacity of gas infrastructure. At coal plants, “you can look out the window and see that 60-day supply of your fuel,” said Joe Nipper, the group’s senior vice president of government relations. But gas plants tend to deliver fuel just as it is needed.”
There’s more; but the gist is that over-reliance on any one fuel causes problems. The problem with nat gas is that NY and New England (with the support of the NY Times, I might add) won’t let new nat gas pipelines be built, so there’s no way to handle spikes in usage. The utilities can’t easily or quickly re-start the closed coal-fired and oil-fired plants to make up the difference. So electricity costs more.
To be fair, NY/NE is against coal big time, against nuclear even bigger time, against oil, and not sure about how it feels about nat gas. We apparently like windmills, though (My comment, not the Times).
Sorry, another funny thing – For peak usage, New England relies on electricity produced by Indian Point, a nuclear power plant in NY. NY is trying to close down Indian Point.
I’m not sure what this really means for NRP, except that coal-fired electricity plants aren't completely dead.
I hope my original post made it completely. But my investing point about the article is that I had no idea that nat gas could cost $ 20 or $ 30 per MMbtu. I also learned the relationship between MMbtus and MMscf. I'd like to know who makes the money on selling the spike nat gas to New England - the pipeline operator or some gas company.
Very interesting, jrad. Would like an explanation from the utilities as to why the rate changes. Would add that many of the natural gas suppliers have long term contracts. Linn Energy says that they have contracts above $5 for the next four years. Would guess other energy sources are the same
coal is by no means dead. projections of future rising consumption are not just fantasy. coal is here to stay. US may use less of it as a percentage of total production in the near future, but it is impossible to eliminate it entirely -- and one reason is the ease of handling supply which you quote.
meanwhile, coal consumption is rising rapidly in asia and europe and US coal exports are sky-rocketing. eastern coal won't benefit in a big way until Panama is widened (2015) but Powder River Basin is already exporting via Gulf of Mexico.
longer term there is an exciting new technological development - google "cabron sponge".
but short term -- i agree that the gas spike in NE is an interesting clue for speculation -- someone is making all that money; but how long is that cold spell going to last? a month?