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Changes in Latitudes:

Natural Gas Power Generation’s Westerly Migration in the Northeast

June 23, 2016 | By Robert Applegate

When trying to come up with catchy titles for analytical articles, sooner or later someone will use the Jimmy Buffett song, Changes in Latitudes, Changes in Attitudes to talk about a trend moving from one location to another.

Get the Point is over a year old, and it’s about time to pull out that reference. In this edition of Get the Point, we will delve into natural gas power burn trends in lower 48 Northeast subregions, and how the fastest action has moved away from one area and into another.

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PointLogic Energy is rapidly working to release deeper analysis of the lower 48 Northeast by breaking the area into four smaller subregions: New England (Maine down to Connecticut), New Yor/New Jersey, the Atlantic (Delaware, Maryland, Virginia and Washington, D.C.), and the Greater Appalachia (Pennsylvania down to Kentucky). By looking at subregions, we can identify local supply and demand trends that can't be as easily perceived when viewing the Northeast as a whole.

As written about in a previous Get the Point article, demand dynamics have changed in the Northeast. Specifically as it relates to natural gas power burn, demand in the Greater Appalachia subregion has nearly doubled since 2010, while only slightly growing in NY/NJ (see Figure 1). As of 2010, the Greater Appalachia subregion contained slightly over 30 million people, while New York and New Jersey contained about just over 28 million people. With major population centers like New York City, the NY/NJ sub region historically was the biggest contributor to power demand in the Northeast.

That has changed. The rate at which power burn has grown in the Greater Appalachia subregion is twice as fast as it has been growing in NY/NJ, and it is now the largest contributor of power burn demand for the entire Northeast region. (Figure 1)

Rapid Growth in Appalachia Power Burn Overtakes NY, NJ

To look at this a different way, see Figure 2. Here, we see that, as a percentage of Northeast power demand, Greater Appalachia has continually grown, while the NY/NJ share of power burn demand has continued to shrink. In 2006, the NY/NJ subregion accounted for nearly 50% of the power market in the Northeast, but now only accounts for about 35%. The Greater Appalachia subregion, on the other hand, had accounted for about 10%, but has grown to account for over 35% of the Northeast power market. Keepin mind that these changes have occurred while the Northeast as a whole has been growing.

Sub Region Percentage of Northeast Power Demand

Why have these trends emerged?

It could be argued that perhaps the Greater Appalachia subregion has just been getting warmer and needing more power burn for summer peak demand. That question can be answered using PointLogic Energy’s dependable burn-per-degree graphs (Figures 3 and 4). Looking at the burn-per-degree relationship in NY/NJ (Figure 3), we see steady growth, much like most of the country. In the Greater Appalachia subregion (Figure 4), we see that the growth rate is much faster than temperature alone would dictate. In this region, the market has fundamentally shifted, and that has created new dynamics of location and velocity of demand growth in the entire Northeast.

Burn per Degree NJ/NY Power burn

Burn per Degree Greater Appalachia Power Burn

Of course, other factors also can be influencing power demand and gas demand overall. On the supply side, hydraulic fracturing in the last 10 years drove an increase in production in the Northeast, but more specifically in the Greater Appalachia subregion. Long before New York officially banned hydraulic fracturing a year ago, Ohio and Pennsylvania were already predominant forces of natural gas supply.

But it was not until this year that Ohio and Pennsylvania not only drove the supply side, but also the demand side.

As gas production rapidly grew in the Northeast and demand was unable to keep pace, prices understandably fell (see Figure 5). Unlike res/com and industrial demand for gas, power burn is especially nimble about reacting to prices of inputs. (Res/com demand is driven almost entirely by weather, and industrial is driven by larger economic factors.)

Power burn is driven by weather, of course. But holding prices even, lower gas prices incentivize more power burn, especially when those prices are competitive with coal.

Natural Gas Price

The price points in Figure 5 are Dominion South and Transco Zone 6, which represent pricing in the Greater Appalachia and NY/NJ regions, respectively. Something to note is that Dominion South prices have fallen at a slightly faster rate than Transco Zone 6, which makes sense when it's considered that Dominion South is closer to the supply sources in Ohio and Pennsylvania.

Ultimately, the old adage of “location, location, location” comes into play. The Greater Appalachia subregion grew production, which dropped the price of natural gas in the region. The falling prices were aided by the bottleneck in transmission capacity that keeps some gas locked into the subregion even though it could command a better price elsewhere. As we know, pipeline companies are working hard to alleviate the bottlenecks and move gas to New Jersey, New York and farther up into New England.

With gas readily available and prices low, power demand in Greater Appalachia responded accordingly. It's grown until the subregion became the predominant driver of power burn in the region. This development does not bode well for coal demand in states that historically have been reliant upon the fuel source for much of their rural economies, but it does mean that when predicting and modeling demand in the Northeast, one cannot simply ask what is happening in New York City.

PointLogic Energy is currently tracking investment companies and electric utilities that are proposing to bring online over 4.0 Bcf/d of additional power burn to Ohio and Pennsylvania by the end of 2017. New York and New Jersey are not seeing such investment on the demand side.

Thus, the Greater Appalachia subregion is expected to continue to take more market share from its neighboring subregion.

With increasing demand in Greater Appalachia, supply will not have to travel as far to reach demand centers, which could further separate the local price points in the Northeast. In summary, the Greater Appalachia subregion has been the powerhouse in the Northeast on the supply side, and it’s now becoming the driver on the power demand side.

In addition to Get the Point coverage of these trends, PointLogic's daily reports provide a granular look at the developments in the fast-paced Northeast. 

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