Marine fuel rule could raise US utility costs

Pending global regulations to minimize sulphur emissions from ships could end up raising some fuel prices for US utilities.

Most electricity generators in the US that once burned residual fuel oil for power have shifted to natural gas because it is cleaner and less expensive. But a few plants in the US northeast still burn oil to add power to the grid when temperatures drop in winter.

The International Maritime Organization's (IMO) 2020 marine fuel regulation, which starts in January, will cut bunker sulphur content from 3.5pc maximum to 0.5pc maximum. That will increase low sulphur residual fuel oil prices broadly, driving up prices of 0.3pc sulphur fuel oil that is used by US northeast utilities.

The 0.5pc sulphur marine fuel market does not trade now, but it is expected to commence in October. Utilities that have excess available storage capacity may be inclined to purchase more fuel now, ahead of any price spikes.

But some public utilities may be prevented by state regulations from taking physical and financial positions for economic hedging purposes. Public utilities typically fill up their tanks in the late summer to early fall during scheduled maintenance outages.

Commercial power generators might have more risk tolerance, but putting low-sulphur residual fuel oil into storage could mean tying up millions of dollars in inventory. Commercial power generators might also have the ability to hedge for residual fuel oil price spikes with financial instruments instead of taking a physical position.

The stability of residual fuel oil stocks in storage has not been a problem. But that could change if ultra-low sulphur diesel (ULSD) is blended with residual fuel oil in greater quantities. ULSD often contains biodiesel. Algae can grow when biodiesel is exposed to sunlight, degrading the fuel.

In 2018, New York burned 1.60mn bl of low-sulphur resid for commercial and utilities power generation, according to the US Energy Information Administration.

Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, Pennsylvania, Vermont and Virginia burned total of 1.97mn bl of residual fuel oil for power generation in 2018, of which 67pc or 1.33mn bl was consumed in January and February.

Ratepayers may not notice any increase, even if resid fuel prices do spike. Power producers in the 10 states generated 593.11mn MWh of electricity in 2018. Of that, residual fuel oil accounted for just 1.91mn MWH, or 0.3pc.