Natural gas prices in region spike

Limited pipeline capacity, combined with frigid temperatures, has sent demand for heat and electricity soaring this winter, leading to spikes in the wholesale price of natural gas in New England.

The sharp increases in the cost of power have forced paper mills in Maine and New Hampshire to cut operations or shutter temporarily, and could potentially mean higher prices for consumers. Nearly three-fourths of Massachusetts’ electricity, and half of New England’s, comes from natural gas, according to Energy Department data. Roughly half of Massachusetts homes also heat with natural gas.

“Price spikes don’t have an immediate effect on our customers thanks to long-term contracts and local supplies that we purchase in the off season,” said Caroline Pretyman, a spokeswoman for Northeast Utilities, the parent company of NStar and Western Massachusetts Electric Co. “But if prices stay high for an extended period of time, then we could potentially see rates go up.”

Pipeline capacity long has been a concern for New England, but the situation has become more acute in recent years as the region has become increasingly dependent on natural gas. ISO New England, the region’s power grid operator, has repeatedly warned that a lack of capacity on local pipelines would cause supply shortages during periods of extreme weather and high demand — such as this past week.

Those shortages could not only increase prices in the long run, but also threaten the reliability of the power system, the ISO has said.

Although this winter is only a few weeks old, the region has already seen some startling price spikes in wholesale energy markets, such as in mid-December, when temperatures fell below freezing. Hourly wholesale electricity prices rocketed, peaking at nearly $1,290 per megawatt hour the evening of Dec. 14, compared with an average 2012 price of abut $36, according to data from ISO New England.

There was another surge Tuesday, when temperatures in Boston dropped into the single digits. Hourly electricity prices that day peaked at $737 per megawatt hour, according to the power grid operator.

Samantha Santa Maria, managing editor of North American natural gas at Platts, a provider of energy information, said the recent cold snaps are big factors in what is happening in the gas and electric markets. But the issue in New England is exacerbated by the pipeline issues in this region that prevent it from taking full advantage of cheap, plentiful natural gas.

The constraints, she said, make it difficult to get natural gas even from places like Pennsylvania, where technology has helped unlock vast gas reserves.

“It’s the ultimate irony: record supply so close,” she said, “but you guys can’t access that.”

High commercial natural gas prices, which are tied more closely to wholesale markets, led New Hampshire paper mill Gorham Paper and Tissue to announce last week that it would cut winter operations and lay off staff.

High prices caused the mill to shutter twice last year, including three days in December, according to local news reports. At least two Maine paper mills also cut back on operations as prices rose in the last month.

Just how much the most recent rise in wholesale prices will affect consumers is unknown. Utilities buy much of their fuel supplies in advance, and prices are locked in under monthslong deals — helping to insulate customers when costs rise in the short term.

“Recent spot market prices should have minimal impacts on our customer bills,” said National Grid spokesman Jake Navarro.

But past price spikes, driven by pipeline constraints, have affected customers. In November, National Grid and NStar warned customers that monthly electric bills would average several dollars more this winter because power had become more expensive over the previous months.

Both utilities are supporting efforts to bring more natural gas into New England, by signing preliminary agreements to transport more of the fuel on Boston’s main interstate pipeline, the Algonquin, which owner Spectra Energy Corp. of Houston, is trying to expand. NStar and National Grid have also said they are interested in additional capacity on the Tennessee Gas Pipeline, which also serves the region.

Senator Edward Markey, a Malden Democrat, also supports more pipeline capacity, and fixing leaks in existing infrastructure.

“These natural gas price spikes are like signal flares, warning us that there could be an economic disaster ahead for New England consumers and businesses,” Markey said. “We need to bolster our capacity to bring domestic natural gas into New England.”

But Santa Maria, of Platts, said she doesn’t see the bottlenecks in natural gas supply easing soon.

“Will supply actually reach demand centers?” she asked. “Looking out into this year, and even into 2015, the answer seems to be no.”

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Correction: An earlier version of this story incorrectly stated the type of increased energy prices that led a New Hampshire company to lay off staff.