American utility companies are facing lower-than-average fuel supplies as they begin to stockpile for the winter.
Part of the reason is the country’s oil boom. Moving oil by rail has become so widespread that train backups are making it hard for utilities to receive shipments of coal, which in some cases is leaving power plants critically low on fuel supplies.
Coal stocks were inordinately depleted during the unusually long, cold snowy winter in the U.S., which saw an elevated level of electricity demand. Months later, coal-fired power plants are still struggling to replace their coal supplies.
“Coal piles around the country have gotten to levels that don’t make us 100 percent comfortable,” David Crane, CEO of NRG Energy, told Bloomberg in an interview. The amount of coal on hand hit just 39 days’ worth of supply in July 2014, the month for which the latest data is available. That is down from a 57-day supply at the same time in 2013.
That is largely due to clogged rail lines. A record grain harvest is coinciding with a historic oil boom. All these commodities are competing for limited rail capacity, making it difficult for coal to get through to their final destinations. Some utilities have even had to resort to using trucks to deliver coal. Several power plants have partially or completely shut down operations due to a lack of fuel supply.
NRG Energy is stockpiling alternatives at many of its power plants, and may burn oil if coal shortages become acute.
The main alternative to coal for electricity is natural gas. But natural gas inventories are also significantly lower compared to one year ago. That, too, is because of record-breaking consumption during the winter of 2014, which caused prices to briefly spike over $6 per million Btu (MMBtu).
On the other hand, just as supplies were burned through so quickly during the cold months, the U.S. has seen inventories replenished at a record pace. That has helped bring natural gas prices down from their highs in January and February (see chart).
But, heading into winter, America’s natural gas stocks are at their lowest levels in six years. Total natural gas supplies reached 3.1 trillion cubic feet (tcf) at the end of September, which is 11 percent lower than last year at this time.
Complicating matters further is the retirement of some nuclear and coal-fired power plants since last year, which could put extra strain on natural gas supplies. An additional 1 billion cubic feet of natural gas demand is likely as a result.
And the biggest problem for the northeast may not be fuel supplies, but infrastructure. A lack of pipeline capacity was one of the main culprits for last winter’s price increases, a problem that has not been addressed in the meantime.
Still, as of mid-October, futures prices are not much higher than they were at the same time last year, despite the recent anxieties voiced by utility executives about having enough fuel for winter. What’s going on?
It is likely that the latest winter weather forecasts eased market fears a bit. The National Oceanic and Atmospheric Administration predicts that the winter of 2015 will see higher than average temperatures for Alaska, Hawaii, the western U.S., and crucially, the New England area. “Last year’s winter was exceptionally cold and snowy across most of the United States, east of the Rockies. A repeat of this extreme pattern is unlikely this year,” NOAA said in its report.
If that is the case, utilities could have no problems meeting winter demand and price spikes would be averted. Here’s hoping for a warmer winter.
By Nick Cunningham of Oil price.com
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