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Northeast Energy Markets: Windfall or Washout?

Fortnightly Magazine - January 1 2000

In today's gas industry, there is a price dance in which wholesale spot prices are played against city gate prices, and city gate prices are played against end-use prices for energy services. The sport involves sizing up the differential cost of different delivery services. As exposed in the review of capacity release markets, discounts for transportation service may be huge when the expected use of the system is much less than full capacity.

The first item to note in Table 5 is the spread between retail commercial gas prices and city gate prices. These spreads are enormous because the reported commercial price represents the price paid by on-system customers. This price does not represent the average cost to all commercial customers both on- and off-system, since an increasing number of large commercial customers now receive gas via non-utility providers, generally at a lower price.[Fn.13] Next note the difference between city gate prices and wholesale prices. Average wholesale prices are generally less than city gate prices. That tends to put downward pressure on city gate prices and, as a consequence, on retail prices as well.

Many off-system providers of natural gas attract commercial customers by offering a price lower than the retail price of the incumbent utility. That pressures distribution companies to lower their price to the remaining customers. In fact, the cost of gas to on-system customers in Massachusetts has fallen each year, from $6.88 per thousand cubic feet in 1996 to $6.08 per thousand cubic feet in 1998. Not surprisingly, the number of off-system customers has risen each year, from 58,135 in 1996 to 157,319 in 1998. They now comprise almost 50 percent of the commercial customers in Massachusetts.

On-Site Power: Benefiting

from High Spark Spreads

To calculate the expected savings in New York from using natural gas to generate on-site power, first choose a particular generation unit and its power-using characteristics. The unit chosen as an example is a distributed generation (DG) unit capable of producing 100 kilowatts of power per hour. The purchaser of this unit would be a fairly large commercial establishment, such as a large restaurant or retail store. Then assume this commercial establishment operates, on average, 12 hours per day, six days per week. That amounts to 7,200 kilowatt-hours (100 kW x 12 hours per day x 6 days) or 7.2 MWh each week. If we multiply this amount by $79.18 (New York's spread of $89.18 less a non-fuel operating cost of $10.00 per megawatt-hour, which includes all variable costs from hookup to regular maintenance), we obtain a value of $570. When this amount is multiplied by 52 weeks in a year, annual savings of $29,645 are obtained.

The cost of a 100-kW unit is between $90,000 and $100,000. Thus, the simple payback period is a little more than three years. Naturally, the more hours and the greater the number of days of operation, the better the economics. On the other hand, if this unit is used at less than full capacity, the poorer the economics.

If the best price the commercial customer was able to