Extreme Cold and Record Gas Demand Spark Concerns of Soaring Power Prices in the U.S.
As frigid weather sweeps into the central United States, analysts forecast a surge in natural gas demand to unprecedented levels in the coming week, potentially propelling power and gas prices to their highest since December 2022.
In December 2022, Winter Storm Elliott significantly increased gas consumption to an all-time high, nearly leading to the collapse of electric and gas systems in the eastern part of the country as numerous power plants shut down due in part to fuel shortages.
The impending extreme weather conditions next week are expected to strain power grids as electricity demand skyrockets, and gas supply faces potential disruptions due to freezing temperatures.
Both PJM Interconnection, the largest U.S. power grid operator covering 13 states, and the Electric Reliability Council of Texas (ERCOT) have issued weather watches for the period from Jan. 14-17. While ERCOT foresees normal grid conditions, it warns of higher electricity demand and the possibility of lower reserves.
Recalling the catastrophic freeze in Texas and other central U.S. states in 2021, which left millions without power for days and resulted in over 200 casualties, concerns are growing over the resilience of power infrastructure in the face of extreme weather events.
Power generators who were unable to operate during Winter Storm Elliott in December 2022 agreed to pay PJM $1.2 billion, underscoring the financial implications of such disruptions.
Gas supplies have already seen declines this week due to “freeze-offs” at production sites in Colorado, Wyoming, and North Dakota. According to LSEG, U.S. gas output was expected to drop by 3.7 billion cubic feet per day to a preliminary 10-week low of 104.5 bcfd on Thursday.
While this decline is smaller compared to losses during previous extreme weather events, total U.S. gas demand, including exports, is projected to reach 171.4 bcfd on Jan. 15 and 174.5 bcfd on Jan. 16, surpassing the current all-time high of 162.5 bcfd set on Dec. 23, 2022.
The impact on power prices is evident, with PJM West Hub prices expected to soar from around $35 per megawatt hour (MWh) on Thursday to approximately $158 next week. Similarly, spot gas prices at the U.S. Henry Hub benchmark in Louisiana are anticipated to rise from around $3.25 per million British thermal units (mmBtu) to about $4.20 next week.
These potential price hikes highlight the vulnerability of the energy infrastructure to extreme weather conditions and underscore the importance of preparedness and resilience in the face of such challenges.