Polar Blast Sends Power Prices Soaring, Spot NatGas Ripping, And Risk Of “Freeze-Offs”

The polar vortex split has spread dangerously cold air across the Pacific Northwest to the Midwest and is expected to reach the eastern half of the United States this weekend and into next week. Power grid operators are on high alert and have prepared generators before heating demand surges. There is also a major threat of freeze-offs that could curtail oil and gas production. 

Around 0700 ET, the average temperature across Montana was -30F, and about a quarter of the Lower 48 recorded temperatures below zero, according to Ryan Maue, a meteorologist and former NOAA chief scientist. 

“That cold air is slowly but surely plunging into the Plains and Great Lakes,” Maue said. 

The Arctic blast has sent next-day power prices at the Mid Columbia hub in the Pacific Northwest to a record high of $1,075 per megawatt hour, according to Reuters, citing LSEG data. The grid’s average power prices range from $81 in 2023 to $52 between 2018 and 2022.  

“Generator owners must take extra care to maintain equipment so that it doesn’t freeze in the cold … particularly as natural gas pipelines may become constrained as the cold spell progresses,” PJM Interconnection wrote in a press release.

PJM is the largest grid operator in the US and supplies power to 13 states, from Illinois to New Jersey. It recently warned that state and federal decarbonization policies had caused reliability concerns in extreme weather conditions. 

Other grid operators, including Southwest Power Pool and the Electric Reliability Council of Texas, have issued weather alerts as the cold blast begins this weekend. 

According to Bloomberg data, Lower 48 average temperatures have already plunged and will stay well below a 30-year trend for at least the next ten days. 

According to Bloomberg, cold weather has skyrocketed spot prices at the US Henry Hub in Louisiana by 300% to as high as $17 per million British thermal units. That compared to $3.31 for the Feb NatGas contract on Friday. 

The catalyst for soaring spot prices is the mounting risk of so-called freeze-offs, which can bring NatGas production offline, thus curbing supplies. 

X user Celsius Energy expects “NatGas production freeze-offs will ramp up. Output will fall to 101.4 BCF, up just +0.8 BCF vs last year & 5 BCF below record highs. Most of these losses are from the Rockies. Look for further losses as arctic air reaches Texas & the Appalachians.:

I’m now projecting a -304 BCF #natgas storage withdrawal for Jan 13-19, only the 3rd -300 BCF drawdown on record, after 2018’s -359 BCF & 2021’s -338 BCF. W/ arctic air now a given, whether the draw ultimately tops -300 BCF will depend on freeze-offs & disruptions to LNG exports. pic.twitter.com/HA2fAy6xSJ

— Celsius Energy (@CelsiusEnergyFM) January 12, 2024

More signs of freeze-offs. 

Rockies gas production continued to decline as freeze offs impacted the region, cutting production from early-January rates of 11.45 Bcf/d to a current seasonal low of 10.46 Bcf/d. We should see a further decline this weekend – for our full production analysis, ping us at… pic.twitter.com/2dXfHs3QaP

— Criterion Research (@PipelineFlows) January 12, 2024

On Thursday, Goldman analysts Daniel Moreno and Samantha Dart said the 23% year-to-date gains for NatGas prices have largely been due to “forecasts for much-colder-than-average temperatures in the second half of January.” 

US natural gas prices have gained 23% year-to-date to $3.10/mmBtu on the back of forecasts for much-colder-than average temperatures in the second half of January. Importantly, freezing temperatures are expected in several producing regions over the next ten days, implying interruptions to production due to freeze-offs.

However, the analysts pointed out: “Once we move past this spell of cold weather, we expect market focus to return to managing oversupply. We estimate this will require prices to realize somewhat lower than current forwards to incentivize more coal-to-gas switching and disincentivize production. Accordingly, we maintain our Sum24 forecast of $2.55/mmBtu vs. current forwards at $2.77/mmBtu.” 

To sum up, early impacts of the polar vortex split are increased power prices on grids due to a surge in heating demand and early reports of freeze-offs of NatGas equipment and or pipelines that curtail production and send spot prices higher.