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Natural Gas Demand Analytics Part 1:

Residential and Commercial Demand in a Low Price Environment

November 10, 2015 | By Robert Applegate, PhD

As the saying goes, “Weather is King,” but increases in demand are not solely a function of weather.

This edition of Get the Point delves deeper into the issue of residential and commercial demand and how, why and where it is growing independent of weather.

Since the summer of 2012 when high temperatures caused natural gas demand at power plants to hit record levels, switching from coal to gas to generate power has been a key topic in analysis of the natural gas market.

Natural gas power generation demand has grown mostly at the expense of coal, but also has grown due to higher renewable standards requiring "peaker" plants to back up the grid when renewable resources are not available. Natural gas demand for power generation for 2015 will be the highest on record (see Figures 1 and 2) -- buoyed by these trends, as well as by the low price of gas.

US Natural Gas Demand for Power Generation

US Demand by Sector

PointLogic Energy is able to use flow and delivery data to infer and model what is happening behind the city gates, in local distribution companies (LDCs) that are not required to publically display their flow data, and in rural intrastate pipeline territories where propane may still be king, but natural gas is slowly taking market share.

In most of the U.S., utilities are regulated monopolies. As such, utilities are allowed to earn a return on capital investments as well as earn back their cost of service. Meaning, in most cases, utilities cannot make money on the price movements of natural gas. They are, in essence, insulated from gas price spikes and drops because those costs are generally passed directly on to the rate payers.

Residential and Commercial Heating Demand

Instead, utilities can increase regulated revenues in two primary ways: earning a return on capital investments and increasing customers through growth and/or fuel switching. By adding customers, utilities can not only gain revenues from increased monthly and volumetric fees, they can also add the cost of the expanding network of pipelines to the costs they charge their rate base to which an allowed rate of return is applied. Across the country, the rate of return utilities earned varies, but is approximately 10%. 

Given their fixed service territory, some utilities look toward fuel conversion as a growth strategy. These might include rural customers using heating oil and propane. (Propane and heating oil providers are not regulated and thus make money by selling the product for more than they purchased it.)

While grabbing a handful of customers in rural parts of the country might not seem like much, when those rural customers are running farms and heating large hen houses with heating oil or drying grain with propane, that demand adds up and becomes noticeable in PointLogic’s models.

If we plot EIA’s residential and commercial petroleum demand, which includes heating oil and propane, versus the temperature, we can eliminate the effect of weather on demand (see Figure 3). Plotting the monthly demand for petroleum for heating versus the temperature allows for polynomial trend lines that show the demand as a direct function of the temperature for that respective year. Ultimately, the shift in the line is the shift in overall demand for that year eliminating dependency on temperature fluctuations. Thus, by comparing the lines and the full year trends, we can see that demand has gone down in the last five years despite a cold or mild winter. 

US Burn per Temperature

On a national level, we can see fuel switching in residential and commercial heating, but breaking down the U.S. into regions allows a more in-depth look at where it is occurring.

PointLogic models power, industrial, and residential and commercial natural gas demand by region. Colder weather increases residential and commercial heating demand, but when the customer base grows we will see more demand at constant temperatures.

The Northeast is an excellent illustration of this development. Looking at natural gas residential and commercial demand versus temperature, PointLogic has identified a demand increase of about 40% from 2010 to 2015 (Figure 4). This means that the customer base in the Northeast has been increasing over the previous five years much faster than population growth, which is approximately 1% increase from 2010 to 2015.

Burn per Temperature Northeast Residential and Commercial Demand

In the coming weeks, PointLogic Energy will publish for our clients a Northeast Weekly report covering all the supply, demand, price and flow data in the region. One of the many valuable features will be the detailed view of sub-regions within the Northeast. This added granularity will provide a much-needed distinction of the interplay and stark differences that occur in the largest-producing and largest-winter-consuming region in the country. Figure 5 below separates the Northeast into the Greater Appalachia, Atlantic, NJ/NY and New England sub-regions.

Northeast Sub-regions

In order to zero in on fuel switching, we can first look at power burn in one sub-region, followed by residential and commercial demand. Looking at the NJ/NY power demand versus temperature graph, we observe steady gains in baseload natural gas fired power generation. Each year from 2010-2015 natural gas demand increased irrespective to temperature, except from 2012-2013. In this instance, the increased demand came primarily from fuel switching at the expense of coal generation.

Burn per Temperature NJ/NY Power Generation

Using the more detailed models of the Northeast, the nuances of residential and commercial fuel switching can also be seen. Again looking at NJ/NY, we can see growth in residential demand from 2010-2014 irrespective of the weather in each year. More consumers were switching from heating oil and propane to natural gas until 2014. The graph shows that 2014 and 2015 follow almost identical trends, suggesting that those who were going to switch in the current market environment most likely had already done so by last year, before the price of propane fell.

Burn per Temperature NJ/NY Residential and Commercial Demand

Reviewing the New England sub-region, we can see residential and commercial heating demand increase from 2010 through 2015. This sub-region includes Maine, a state with a large population that still depends on fuel oil due to the historic lack of access to natural gas infrastructure. Maine is currently courting several utilities that are interested in investing in natural gas infrastructure.

Burn per Temperature New England Residential and Commercial Demand

If we take the average residential and commercial heating each month, normalized to the average temperature that month and year, we can see this trend in even greater detail (Figure 9).

New England Normalized Residential and Commercial Demand

Increased demand for natural gas heating is coming at the expense of propane. When both products are comparatively priced, it becomes a zero sum game for exploration and production targeting wet gas regions, but it can help companies situated in drier plays.

On the demand side, utilities can make money whether gas is cheap or expensive by growing their customer base or expanding their network. Under the regulated monopoly system, natural gas utilities can grow by targeting customers within their service territory that consume propane or fuel oil.

A similar fuel switching trend is working its way through the power sector, with generating facilities moving away from coal towards natural gas.

PointLogic Energy's data and proprietary modeling provides not only a view of where and how much each demand sector consumed, but also a short-term forecast view of where and by how much demand is changing. Coupled with production and flow data, the complete picture of national, regional and sub-regional markets provides the actionable intelligence one needs to survive. To learn more, contact info@pointlogicenergy.com.

 

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