Friday, December 3, 2021
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Natural Gas Shortages

After struggling through supply chain shortfalls, product shortages and cost increases due to the COVID pandemic, consumers and grid operators have yet another shortage to deal with this winter: natural gas. As fall comes to a close, natural gas distributors around the world have started hiking their rates in response and the worst is yet to come.

Here in Canada, FortisBC Energy Inc. warned back in September that they would increase rates starting in October, with the majority of customers expected to pay around $8 more a month. Closer to home, Ontario’s Enbridge Gas said the typical residential customer can expect a bill increase of $7 to $44 a year depending on their region. Manitoba Hydro has said the annual bill for a typical household will increase by approximately 8.7%, with larger volume customers potentially seeing increases as high as 19%.

The impact of pricier natural gas goes doesn’t stop at increased utility bills and will hit low-income Canadians the hardest, says Sohaib Shahid, director of Economic Innovation at the Conference Board of Canada.

For starters, higher heating bills will push up housing costs, which already account for nearly a third of the total annual spending of Canadians in the bottom 20% of the income distribution, Shahid says. Comparatively, those in the top 20% devote just a fifth of their annual spending to things like rent, mortgage, and utilities.

Additionally, the rising cost of natural gas and other fossil fuels also puts upward pressure on the prices of a variety of other products. Higher energy costs impact nearly every other industry and make it more expensive to produce, transport and store food for example, which represents another large cost that weighs especially heavy on low-income families.

On the industrial side, manufacturers who rely on natural gas to produce their goods will be forced to pass on yet another price increase down to consumers after months of struggling with pricier inputs and supply-chain headaches.

What’s causing this increase in price?

The reason natural gas prices are climbing comes down to the age-old issue of supply being unable to keep up with rising demand. As COVID-19 restrictions loosen again and economic activity around the world picks up speed, the need for natural gas has increased fast. At the same time, the uncertainties of the global pandemic have made producers reluctant to make significant capital investments in new drilling programs, and Canadian natural gas storage levels are at five-year lows.

This supply-demand mismatch is also affecting all kinds of commodities and consumer products — from agricultural staples and patio furniture to diary products and used cars. All of these factors culminate in heightened levels of inflation around the world with many countries reporting multi-year or multi-decade highs. In Canada for example, the annual inflation rate reached 4.1% in August, setting a new 18-year record.

In the energy market, efforts to move away from coal production and retire nuclear power plants have also increased the demand for natural gas. At the same time, extreme weather events linked to climate change have resulted in unusually low energy output from renewable sources like wind, hydro, and solar. In California, long droughts have restricted the state’s ability to generate electricity from their various hydropower plants. At the same time, solar outputs have also been constrained by smoke cover from wildfires, analysts said.

In Europe and Asia gas prices have more than tripled this year, causing manufacturers to curtail activity from Spain to Britain and sparking power crises in China resulting in rolling blackouts. The situation isn’t quite as dire in North America, where the US and Canada have their own supplies of natural gas. But even here, prices are still much higher than they’ve been in the last six years.

How will this effect the grid?

Although Ontario sources the majority of our electricity from clean and/or renewable sources like nuclear, hydro, solar or wind, we still have a significant number of natural gas-fired peaker plants that we rely on to meet peak demand. As mentioned above, rotations away from coal and nuclear power are resulting in increased reliance on these plants. The operation of these assets was already on the expensive side in the first place due to their quick response/start time and the fact that they’re relied on to supply extra energy when the grid load is highest. This allows the operators and owners of these plants to be able to demand a high price per MW to supply the grid in crucial times.

Now that the fuel price for these peaker plants is also on the rise, the Ontario grid operators and large energy users should expect the Hourly Ontario Energy Price (HOEP) to experience even sharper price spikes when the demand on the grid approaches the supply limits and they are forced to rely on peaker plants. Read more about peaker plants in our short blog post linked here.

Although to a lesser extent, the natural gas price increase will also affect the owners of smaller on-site natural gas generators. These facilities rely on natural gas generators for a multitude of reasons including: insurance against power outages, participation in Demand Response programs, covering of load for the ICI (industrial conservation initiative) program, and other crucial business operations. Rising gas prices will result in these resources becoming less economically feasible and will have noticeable impacts on the bottom line of many businesses, especially those who require natural gas to fuel key machinery involved in their processes.

Coincidentally, these gas shortages have arisen as the Independent Electricity System Operator (IESO) is getting more serious about phasing out the use of natural gas across the province. The increased costs should serve as another reason to make more concentrated and actionable plans in order to help the grid break free from their reliance on natural gas and fossils fuels - as if decreasing emissions and slowing climate change wasn’t incentive enough.

We have the technology required to supplement the load that is currently being served by these peaker plants, we just need the decision makers and regulators to stop kicking the can down the road and finally pull the plug on fossil fuel power for good. With more renewable energy, battery resources and other DERs being installed and coming online each day, we will soon live in a province that has no need to rely on the outdated power generation assets of the past.

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