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Northeast Energy Markets: Windfall or Washout?

Fortnightly Magazine - January 1 2000

Prices:

Capacity Release Market

Carries Promise of Discounts

Probably the most important pipeline routes for moving gas into the Northeast are Tennessee Zones 5 and 6. Interestingly, capacity release markets in both zones have been quite robust.

The size of discounts per transaction available was sizable during the more than 5,000 capacity release transactions for the period 1996 through 1998 on Tennessee Zones 5 and 6. The median value indicates that for 50 percent of the transactions, discounts of 71 percent and 87 percent off normal rates were received on Tennessee Zones 5 and 6, respectively. The statistics also indicate that 50 percent of the capacity release transactions on Tennessee were for 558 MMBtu per day or less. That figure represents just about the amount of gas needed to produce 5 MW of power per hour from a generator with a heat rate of 7.8 MMBtu per megawatt-hour, operating for 16 hours.

The large discounts available on Tennessee should provide opportunities for shippers to move gas to power generators during the non-heating season since the largest number of releases to both zones occurred during the spring and summer months. Although the low price may suggest excess overall pipe capacity, that is not necessarily the case. Why is that? Sellers are willing to sell the capacity at a low price because of the high insurance premium associated with their retaining these rights for certain times of the year or for the future, when demand grows or is likely to surge. At such times, these rights have great value.

The Power Grid: Constraints Boost Value

of Gas Pipeline Expansions

A close look at Figure 1 indicates that large changes in power prices in one region are not always coupled with large changes in price in another region. The existence, at times, of weak relationships between changes in power prices in the two areas suggests possible constraints in moving power between locations. However, the average wholesale power prices displayed in the figure are not comprehensive. Thus, they are not sufficient guides for indicating the implications of constraints in power transmission and distribution on power costs, especially under changing market conditions. Models that attempt to replicate the operation of the power systems are a better choice.

When performance of the New England region (NEPOOL, or New England Power Pool) and New York Power Pool (NYPP) is evaluated through a detailed model representing the operation of the system, some striking results are revealed.[Fn.12] When the system is near full capacity in New England, under the regulated regime, the marginal cost is double that in New York. Nearby areas have much different marginal costs. This situation suggests that companies with power generation in the poorly connected areas will obtain significant profits, especially when demand surges.

The figure also reveals that under deregulation, when demand in areas south and southwest of the Northeast is reduced by as much as 20 percent, and thus capability to export power to markets in the Northeast is improved, not that much happens in some areas.

City Gate Prices: High Retail

Markups Should Fall