Los Alamos, New Mexico— With colder weather ahead and inflation hitting hard, people are concerned about the fluctuating cost of natural gas and how it is going to impact their budgets this winter. While the details are complex, the overview is simple: it’s a classic story of supply and demand.
In Los Alamos, natural gas customers of the Department of Public Utilities (DPU) have paid a pass-through cost-of-gas rate since 2013. More specifically, they pay a 3-piece charge that includes a standard service charge, a fixed rate per therm and a variable rate per therm. That variable rate changes from month to month to match the customer’s share of the actual cost that DPU paid to purchase the natural gas commodity. The fixed rate and service charge cover the expenses budgeted for infrastructure, maintenance and operations.
Historically, the natural gas rate in Los Alamos has remained somewhat steady and relatively low. In the 24-month period from November 2018 through October 2020, the variable rate averaged $0.22 per therm, with a high of $0.37 and a low of $0.05 per therm. The factors that contributed to the cost of gas were predictable and generally consistent. The next 24 months show a much different story.
An extreme winter weather event occurred in February 2021 when an unprecedented amount of snow, sleet, freezing rain and unusually cold temperatures hit southeast Texas for eight days straight. The state’s electric grid required rolling blackouts and the demand for natural gas skyrocketed. When demand escalates, so do prices, so even though the grid for the rest of the country was safe from the risk of rolling blackouts like those seen in Texas, we couldn’t escape the high cost of natural gas that resulted as it was still needed for electric production and heating homes.
In Los Alamos, that impact was felt by residents in April 2021. The variable portion of the natural gas rate is based on actual prices already paid so there is a lag between the hit to DPU’s budget and the pass-through to the customer. For two months in a row, the variable rate was $0.99 per therm, the highest variable rate that is allowed to be passed to the customer per the county ordinance governing natural gas rates.
In the past 19 months, the variable rate has been more volatile and often much higher than in the past, fluctuating between zero cents and $0.99 per therm. It has bottomed out three times and hit the max four times. Why? Because supply and demand are equally volatile.
DPU Deputy Utility Manager of Electric Production Jordan Garcia anticipates this volatile dynamic in pricing will continue into the foreseeable future. The nature of the variable rate is to capture the cost paid by DPU for natural gas purchases, and prices jump in response to demand behaviors.
While the most obvious demand is consumer demand for heating, other demands may have larger impacts. Demand from the electrical industry is increasing with the retirement of generation resources such as coal plants and nuclear plants. Global demand for exported natural gas has also increased, with Europe purchasing Liquified Natural Gas (LNG) from the United States in greater proportions than in previous years as it faces supply shortages due to the conflict between Russia and Ukraine. And demand caused by extreme heat and cold events, such as those in Texas and the Pacific Northwest, further stress the supply of natural gas from the San Juan Basin which is the source of our natural gas in Los Alamos.
What about renewables? When coal and nuclear plants are decommissioned, there is generally an intent to replace them with renewable energy sources such as wind and solar. Natural gas can’t be removed from the equation though. At this point in time, wind and solar energy are typically only available when the wind is blowing or the sun is out. When the air is still and it’s dark outside, natural gas firms up the power supply, or fills in the gaps, thus replacing carbon-generating sources with renewables actually increases the demand for gas at this point in time.
“Natural gas demand is increasing and the infrastructure that supplies gas is the same as it was a decade ago,” Garcia said. “Our supply channels include production hubs, storage and transmission. In Los Alamos, the San Juan Basin is our production hub. New Mexico does not have supply in storage and the transmission pipelines are feeding not just us, but any point in the country that will pay enough money to get the gas. That’s why weather events that negatively impact other states and the demand for natural gas exports drive our costs way up.”
The U.S. Energy Information Administration (EIA) published a Winter Fuels Outlook for October 2022. In short, EIA says wholesale commodity natural gas prices are expected to be higher this winter compared to last winter, leading to higher prices for both natural gas and electricity in the retail market. Among the reasons, EIA’s outlook points to strong demand for natural gas resulting from growing liquified natural gas (LNG) exports. EIA’s outlook also forecasts that temperatures this winter will not only be colder than last winter, but also colder than the average winter of the past decade.
“We all know that cold weather drives up household heating expenditures because it takes more energy to heat houses as temperatures drop, but there’s more to the equation,” Garcia said. “Cold weather drives up demand and with higher demand, we need more supply. Our supply is already stretched so energy prices are likely to keep rising as we purchase the same gas that everyone else wants too.”
EIA forecasts U.S. households will spend about 28% more to heat their homes with natural gas this winter than they did last winter, and it could be more if temperatures are colder than last year.
That’s a tough pill to swallow for people on fixed incomes. So what can we do about it? DPU Water and Energy Conservation Coordinator Abbey Hayward has suggestions for easing the pain of rising energy prices.
“The coming winter is likely to be hard for many utility customers but there are small changes they can make to ease the burden a little.” Hayward said. “Those changes don’t have to be as drastic as replacing appliances with more efficient ones, though that certainly helps.”
Hayward’s suggestions follow.
- Seal air leaks around doors and windows, behind outlets and around plumbing pipes.
- Wash laundry with cold water.
- Keep fireplace dampers closed when the fireplace is not in use. An estimated 8% of heat loss escapes through the chimney.
- Prepare several meals in advance so you can maximize residual oven and stove heat without reheating cooking appliances daily.
- Put your thermostat on a schedule: 68F when home during the day, 62F at night or when away.
- Cover bare floors with rugs or carpets and replace light curtains with thicker drapes.
- Change HVAC filters monthly during peak usage. A dirty system works harder.