One explanation for this past winter’s soaring utility bills was the disruption in global natural gas supplies caused by the war in Ukraine, but it turns out the source of many Colorado households’ woes was closer to home: California.
Drought cut California hydropower production to half of normal levels in 2022, and to fill the gap the state’s utilities went on a natural gas buying spree that drove up the cost of delivered gas to Colorado utilities by almost 100% over the course of the year.
“California bid up natural gas in December and January in basins Xcel buys gas in,” said John Harpole, president of Mercator Energy, a Littleton-based gas brokerage firm. “As a result of California, Colorado ratepayers paid more for natural gas.”
The California scramble pushed up prices across the West, with the cost of natural gas delivered to Colorado utilities, the so-called Citygate rate, rising to $9.83 for a thousand cubic feet in January 2023 from $4.97 in December 2021, according to the U.S. Energy Information Administration.
The drought-related gas prices didn’t only affect home heating bills, but electricity costs as well, with the EIA estimating it could have added 5% to prices in Western electricity markets.
The California price shock is both a cautionary tale and one that is likely to be repeated as natural gas markets become more volatile and other forces from climate change to the need to backup growing renewable electricity generation play a role in the demand for gas.
“Consumers have to be aware that natural gas which used to be far more stable isn’t anymore,” said Albert Lin, executive director of Pearl Street Station Finance Lab, a clean energy think tank.
In Colorado, this falls most heavily on Minnesota-based Xcel Energy, the state’s largest natural gas and electricity provider. The company has 1.5 million natural gas customers and depends upon natural gas for 29% of its electricity.
“We are keenly aware of the financial challenges some of our customers experienced this winter,” Bob Frenzel, Xcel Energy’s CEO, told financial analysts in January. “We are always empathetic of customers who are feeling an increase at the grocery store, in rent.”
Still, when the price of natural gas soars so do customer bills, with some households seeing their utility bills double or triple last December.
In the wake of the high winter utility bills, the legislature passed Senate Bill 291, in an effort to deal with the volatile natural gas market and the future use of natural gas in the state, as well as an effort to improve the way utility rates are set.
“The bill provides ratepayers some relief for volatile prices in the short term and in the long term it gets a handle on our investments in the gas system,” said Meera Fickling, a senior climate policy analyst with the environmental group Western Resources Advocates.
Natural gas is sold and bought by utilities in an unregulated market and the cost of the gas is directly passed on to customers — rising when prices are high and falling when they are low. The utilities neither make money nor lose money on the price of gas.
Whether the utilities buy at low prices or high prices, whether they manage their gas supplies well or poorly, they face no risk or losses.
In February 2021 Winter Storm Uri simultaneously boosted demand for natural gas and shut down natural gas Texas production leading to skyrocketing prices. The PUC granted Xcel Energy permission to recover an extra $500 million in storm-related gas costs from its Colorado customers.
Four electric cooperatives that buy wholesale power from Xcel Energy filed a complaint with federal regulators contending that the utility mismanaged its supplies and asked for a partial refund. Xcel Energy denies the allegation.
The cooperatives are seeking $6.3 million, but Tom Walsh, CEO of Grand Valley Power, one of four co-ops, said in Senate testimony that the cost to Xcel Energy household and small business customers could be $90 million.
“You have a terrible situation where the motivations do not line up at all with the real-world risks,” Pearl Street’s Lin said.
For the past decade Colorado natural gas customers benefited from low and stable Citygate natural gas prices of between $2 and $5 per thousand cubic feet of gas, according to EIA figures.
Gas from Colorado, Wyoming and Utah has been a bargain, selling at a discount to national prices, because there has been limited pipeline capacity to move it to other regions.
Between 2013 and 2020, rates for the Colorado Interstate Gas Company, a major source for the state, averaged 16 cents lower for a million British thermal units than the gas on the New York Mercantile Exchange, according to Mercator Energy data.
That changed with Winter Storm Uri. Since then, the Colorado Citygate price has bounced up and down, but remained above pre-Storm Uri prices.
This past winter California utilities added to the price woes with the Southern California Gas Index hitting as high as $47 for a million Btus in January. The market pressure pulled up Colorado Interstate prices as well, lifting them $3.60 higher than the NYMEX price.
Brief moments of financial pain may become more common
That was a short-term spur to higher prices, but industry analysts say that such spikes may be increasingly common as a result of the growth of renewable generation, if natural gas is the backup, as well as severe swings in the weather.
“Renewables can do a number on gas prices because there are periods where the weather is not cooperating,” said Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis, which is focused on the costs of transition from fossil fuels to cleaner energy.
Gas markets could also be roiled by climate change which will bring polar freezes in the winter, summer heat waves and drought, creating demand peaks. “There are complicated feedback loops now in the gas market,” Williams-Derry said.
Given the potential swings in demand, the availability of supply and whether there is adequate pipeline capacity to deliver gas will determine whether there are price spikes, Harpole said.
“It is going to happen in these high demand winter months more and more as more non-dispatchable generation is added,” Harpole said.
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To deal with these swings, Senate Bill 291 requires utilities to come up with a gas management plan that includes a cap on the monthly charge to customers. When prices are above the cap utilities will be allowed to recover that money over five years.
The plans, the bill said, could include techniques to reduce volatility such as hedging supplies, long-term contracts and storing more gas. Xcel Energy currently hedges about 20% of its needs.
The risk in these approaches is that consumers could be stuck with higher prices when the market prices fall. It is a trade-off between a potentially higher price and certainty on costs, said Robert Kenney, CEO of Xcel Energy’s Colorado subsidiary.
The Colorado Public Utilities Commission, which regulates for-profit utilities in the state, is directed to come up with a cost-sharing plan between customers and their utility when prices are high.
“This makes sure that they have some skin in the game on these fuel costs,” Senate President Steven Fenberg, D-Boulder, a cosponsor of the bill, said in hearing testimony.
Part of that cost-sharing plan would be an incentive, or bonus, for a utility if they manage to keep gas costs down.
“We have an inherent incentive to purchase least cost gas, because it’s in the best interest of our customers,” Kenney said. “One could argue that you don’t need an incentive. But if there is a belief that we do need an incentive, then we want to work constructively with the commission to design it.”
Kenney said the company is already set to propose a performance incentive mechanism for natural gas this spring as part of a gas cost adjustment case before the PUC.
Can Xcel meet its own goal of being zero emissions by 2050?
The bill also calls for a study to take a hard look at future natural gas infrastructure investments, does away with a subsidy for new natural gas home hookups and makes it easier to terminate gas service.
The state has a target of cutting greenhouse gas emission 90% from 2005 levels by 2050 and it is promoting the switch from home heating and appliances powered by natural gas to those run on electricity, ideally generated from zero-emission sources such as wind and solar.
The worry, Fickling said, is that as the customer base dwindles as the state moves to electrification as part of its effort to cut emission, gas infrastructure investments will no longer pay for themselves.
“What happens when investment outpaces sales?” she asked. “That’s what we’ve seen in the last few years.”
Senate Bill 291 calls for a study to “evaluate the risk that stranded or underutilized natural gas infrastructure investments pose.”
Xcel Energy is planning $2.5 billion in new natural gas investments in Colorado by 2027, according to an April investors’ presentation.
Xcel Energy sells electricity in eight states, but the bulk of its natural gas business is in Colorado, where 1.5 million, or 72%, of its natural gas customers live.
The company does not break out gas revenue or profits by state, but based on the per-customer revenue provided in its annual report, the Colorado gas business generated about $800 million in earnings in 2022.
Xcel Energy must file a “clean heat plan” with the PUC by August to show how it will reduce emissions in its natural gas business and it also must file a gas infrastructure plan with the commission laying out its investment plans.
The two plans will show how the utility can balance its gas business and emissions reductions, Kenney said, noting the company has its own 2050 zero-emission goal.
“Natural gas does remain part of that system and we believe in maintaining options for our customers on how they heat their homes and businesses,” Kenney said. “We think that it’s going to continue to be an important part of the energy mix into the future and we have an obligation and requirement to serve existing customers.”