Last January, the U.S. East Coast nearly ran out of energy.
On the consumer end, there was not enough natural gas. There was not enough propane. There was not enough electric power. Unusually cold weather took out infrastructure just as more infrastructure was needed. Consumers paid a huge price.
The nation has plenty of energy. There is more oil and natural gas than anyone knows what to do with. In fact, oil producers cannot find enough business in the United States, so they want to begin exporting to other countries. The same is true for jet fuel, fuel oil, motor gasoline, natural gas, nuclear and coal.
The issue is infrastructure. There are not enough pipelines or transmission lines to move energy from areas of surpluses to areas of need. When the temperature drops, demand increases, infrastructure quickly reaches its limits and energy cannot reach consuming markets. When the temperature drops further, equipment begins to break down and the imbalance between supply and demand is worse.
Obviously, the problem is worse in the nation's northern climates. Nevertheless, Texas has had its share of underperforming infrastructure.
Last January was an extreme case. Demand on Spectra Energy's (SE) Algonquin Gas Transmission system was beyond full capacity. At the consumer end of its pipe there was not enough natural gas remaining to serve New England. The region was forced to import liquefied natural gas (LNG) from foreign sources just to keep homes warm and power plants running.
There was not enough LNG. Rumor has it that some local distribution companies were injecting propane into natural gas distribution systems to make sure homes had enough heat.
If the nation's infrastructure has difficulty heating homes, it would seem it should have even more difficulty delivering fuel to power plants. Now we learn it does.
Last January, the nation's power grids saw a huge increase in demand. According to PJM Interconnection's recent report, the mid-Atlantic grid needed about 38% more power than was normally expected. At the same time, PJM saw power plant capacity fall off the grid.
On Jan. 7, 2014's peak hour of consumer demand, about 40,000 megawatts were forced off the grid by weather. That is the equivalent of 40 nuclear power plants and that is only one out of ten grids.
Of the 40,000 megawatts sidelined, almost 19,000 megawatts were power plants using natural gas. In addition, almost 14,000 megawatts of coal-fired power plants were sidelined.
It turns out cold weather knocks out surprising amounts of infrastructure. Everything is fine until temperatures drop below freezing. As the wind chill drops 20 degrees below, forced outages increase by about 150%. If temperatures drop 50 degrees below freezing, forced outages can increase by more than 5,000%.
As last January demonstrated, the only reliable source of power was nuclear. The reason is their fuel. Nuclear plants do not need a pipeline or rail to constantly feed fuel. In fact, most nuclear plants do not need to be refueled for 18-24 months.
Last January provided a boost for nuclear plant operators like Exelon (EXC), Entergy (ETR), First Energy (FE), Dominion Resources (D) and Public Service Enterprise Group (PEG). In fact, nuclear power plants like Indian Point, Millstone, Seabrook, Salem, Hope Creek, Peach Bottom and Calvert Cliffs kept the lights on for Baltimore, Philadelphia, New York and Boston.
But there were not enough nuclear power plants. Grids were forced to shed loads. Rolling brownouts were taking place. If temperatures dropped another degree, rolling blackouts across the East Coast were in order.
While the public was generally unaware, government policymakers got a wakeup call. As an uncertain winter approaches, government is rethinking its strategy of shuttering coal-fired power plants.
In fact, PJM is proposing to change its policies. It wants to modify its power markets to reward generators who can deliver reliable power. Its Capacity Performance Product is now before the Federal Energy Regulatory Commission (FERC) for approval.
There will be back and forth between the energy markets, market participants and FERC. But there is little doubt; there will be change. Any change can provide additional revenues for natural gas pipeline companies and base-loaded power plants.
Pipeline companies benefiting from policy changes involve interstate pipeline companies. This includes companies like Spectra and Kinder Morgan's (KMI) group of companies.
Independent power companies owning reliable generation will also benefit. This includes the nuclear utilities previously mentioned. It may also benefit Dynegy (DYN). This is why last week's Dynegy deals with Duke Energy (DUK) and Energy Capital Partners were incredibly strategic.
Cold winds sobered up policymakers. As a result, it may pay generators to hold on to nuclear and upgrade coal plants. Previously announced retirement plans may have been premature.