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Northeast Energy Markets: Windfall or Washout?

Fortnightly Magazine - January 1 2000

negotiate was the on-system retail industrial customers' price - $4.09 per thousand cubic feet, or $3.97 per million Btu, in 1998 - then the spread would be $65.31 and total savings would be $24,452 instead of $29,645. The payback period would be about four years instead of three. It is worth noting that the off-system industrial customer probably pays less than $4.09 per thousand cubic feet.

The economics work out similarly for units with capacities from 30 kW to 200 kW because the cost per kilowatt for units of this size is $900 to $1,000 per kilowatt. Finally, if the system were only operated, on average, at 80 percent of full capacity, then the savings would be 80 percent of $24,453, or $19,532, over a payback period of five years.[Fn.14]

Overall, the loads of large commercial customers likely will be relatively constant, or if not constant, may even increase in the summer to satisfy a space-cooling load previously satisfied by their local power providers. Since the gas system generally is underused during the summer, that will improve the overall economics of the gas system. Fixed investment will be spread out over an increasing amount of gas. If enough of these customers are added, then the average cost of gas per customer in the summer will decline for all customers. That potential provides an additional incentive for distribution companies to lower the cost to these customers and an additional reason for these commercial customers to negotiate a reduced transmission/distribution cost from the utility.

Infrastructure Outlook: A Mix of Factors

The major growth area for natural gas in the Northeast United States during the last five years has been the commercial sector, and that is expected to continue through 2000. Even without including the impact of the new Maritimes & Northeast pipeline, natural gas demand in the commercial sector is estimated to increase by at least 200 MMcf per day between year-end 1998 and year-end 2000, using average growth rates experienced in the 1990s.

Increased growth in this sector will continue to be influenced by price reductions obtained by customers from non-utility providers. Combined demand in the utility and industrial sectors also is expected to increase by about 190 MMcf per day. However, forecasts for these sectors may be understated because of reporting problems with the historical data used to obtain the forecasts.[Fn.15] The utility sector forecast also does not include any substitution of new gas generators for pre-1960 generators, because the most recent data indicates this replacement has not yet begun.

The potential demand from the residential sector, which consumes more natural gas than any other sector in the Northeast, appears to be great. Recent EIA forecasts indicate that distillate oil prices will continue to be much less than natural gas prices for residential customers in the Northeast and New England regions in the next several years. Yet, the difference in prices is expected to become smaller.[Fn.16] Although demand will increase because some households will be willing to pay the reduced premium price associated with the more convenient source of energy, demand will