Thanks to a bone-chilling Arctic air mass, winter arrived this year with a dramatic temperature drop throughout much of North America. With unusually warm air settling over the North Pole, the decreased temperature gap between north and south caused the Jet Stream to dip, bringing frigid air southwards. As in 2014, the term “polar vortex” re-entered popular discourse.
According to the National Oceanic and Atmospheric Administration, this huge accumulation of frosty air resulted in more than 1,600 daily records for cold being tied or broken in the last week of December. But the weeks-long deep freeze was by no means uniform: while much of the East Coast battled a brutal winter storm, West Coast temperatures were higher than normal.
As climate scientists assess these unpredictable weather patterns, this season’s polar vortex and “bomb cyclone” have affected natural gas markets throughout North America. For starters, the intense cold sent regional U.S. natural gas spot prices higher as demand reached record seasonal highs.
Ontario Prices Spike
In Ontario, natural gas prices had been in a low and stable holding pattern in recent years, with the last price spike occurring during the winter of 2014. Since that spike, the price dropped quickly, remaining relatively stable for the past four years. The December cold blast created price spikes.
Ontario prices have been affected even more so because the province relies on gas delivered via pipeline from other parts of North America and from natural gas storage facilities such as Ontario’s Dawn Hub, which became strained as gas could not be withdrawn fast enough to meet demand.
What is Curtailment?
A reduction of gas deliveries, or curtailment, may occur due to a shortage of supply or because demand exceeds pipeline capacity.
There are two reasons utilities will call a curtailment event. One is storage management. Utilities manage stored gas in a manner that ensures there is enough supply to meet the heating demand for the entire winter. Most large industrial consumers have special interruptible delivery contracts, allowing utilities to curtail supply to their facilities. These large consumers usually have alternate supply options such as oil or propane, which are much more expensive than natural gas and can cause operational issues if they have not been used recently. To incentivise large natural gas consumers to agree to an interruptible contract and occasionally switch to a more expensive alternative fuel, these industrial users pay a discounted delivery rate for their natural gas.
Having different delivery cost tiers also ensures that residential consumers will always have enough natural gas to heat their homes—even in the coldest days.
The other reason for a curtailment is distribution capability. Distribution pipes are sized to meet expected demand throughout the year. But pipelines are not always large enough to move enough gas to where it is needed (e.g. pipes going to Leamington are not large enough to meet the expanding greenhouse industry).
Larger users will typically sign a gas delivery contract—with maximum hourly, daily and annual usage amounts—to allow the utility to manage the flow along the feeder pipes. If there is more demand in a certain area, the utility will expand the pipeline to meet the expected demand. If, however, the pipeline is limited, there will be commercial consumers along the pipeline that will be asked to shut down or curtail their gas usage.
Curtailment Delivery Supply (CDS)
Natural gas consumers on the Enbridge system with interruptible contracts have been asked to turn off their gas and use alternative fuels (curtailment was called January 3–7). On the first day, consumers were allowed to source incremental gas using Enbridge’s Curtailment Delivery Supply (CDS) but this was not available Jan 4–7. Although Enbridge’s CDS is a valuable service, there is limited pipeline capacity into Toronto and CDS gas has been increasingly difficult to obtain.
Union Gas also recently sent out a notice of limited activity at their Dawn storage facility, stating: “Due to sustained extreme cold weather and high requests for interruptible activity, interruptible storage requests may not be scheduled on the Dawn Storage to Dawn (Withdrawal) path.”
Extremely cold weather also affects a consumer’s balancing position in terms of forecasted usage versus contracted daily quantity. On the Union Gas system, the winter checkpoint is approaching and consumers will most likely be required to buy more gas at balancing time in February. The additional gas usage this winter will also affect year-end gas balancing requirements.
Ontario’s Industrial Conservation Initiative (ICI)
The Ontario ICI program gives larger electricity consumers the option to switch to a different distribution rate called Class A. Although the ICI program began five years ago, many commercial consumers switched to Class A because the minimum demand threshold was reduced in 2017 to allow more customers to participate. The benefit is that consumers pay a lower global adjustment (GA) rate, a charge that has sometimes been over half of the overall electricity bill. To take maximum advantage of the lower GA charge, electricity users must reduce their usage during the five hourly Ontario peaks throughout the year.
Whereas peak usage in Ontario typically occurs in the summer, electricity demand is peaking this winter. For Class A participants that are actively trying to reduce their electricity usage during the five Ontario peaks, management of usage must occur more often than just on hot summer days. Predicting the Ontario demand peaks is challenging and is becoming even more so with extreme temperature occurrences.
Class A electricity consumers (ICI) will be affected if more electricity is being used during these winter peaks. Thus far for this ICI period, Ontario peaks have occurred in June, July and September, with a high likelihood that January will see at least one peak demand hour. The only other time a winter Ontario peak was recorded was 2015.