Growth in natural gas demand forecasts these days rely heavily on projections of increased power burn. Lack of coordination between the gas and electric industries threatens to limit that expansion. The greatest challenge is the security of gas supply to the generators and how that impacts reliability. Regional differences in the electric power market appear to make national regulations to secure gas supplies unworkable. Today we review FERC efforts to understand and perhaps attempt to standardize those regional differences.
Our previous post on the FERC gas-electric interface initiative (see Dogs and Cats Living Together) discussed the effort to facilitate better coordination between the industries. The goal is to improve reliability by providing tools and eliminating barriers to the increased use of natural gas in the power sector. A series of regional technical conferences was held across the country last fall to gather input from interested parties about coordination concerns. We waded through the feedback provided to FERC staff at those regional technical conferences (you can read the full 41 page report here) to extract the important points.
Two principal challenges emerge from the feedback. The first is that the electric power industry is still largely organized on a regional basis meaning that differences in market operations and generation dispatch are sufficient to make “national” rules hard to implement. The second challenge is that the level of concern about securing supplies to feed increased natural gas powered generation varies widely depending on local infrastructure and demand. Those players that don’t currently suffer any supply concerns will inevitably resent “national” rules designed to solve coordination concerns in gas supply hot spots. As a result the FERC has its work cut out to find common ground among the “Cats and Dogs”.
Firm Gas Supplies
The big issues that came up at the Northeast, Mid-Atlantic and Central regional conferences were all related to the firmness of gas supplies for power generation. The firmness issue is not new but it is critical to understanding the coordination challenge and requires a little background explanation. Take a deep breath.
The US electric power industry has always regarded reliability as its number one priority – making sure that the lights don’t go out. The North American Reliability Corporation (NERC) coordinates industry reliability that is largely achieved by making sure there is adequate reserve generating capacity available to keep the system running in the event of failure. However the issue of security of fuel supply has not traditionally been considered part of system reliability. When the electricity markets were “deregulated” in the 1990’s and early 2000’s the independent system operators (ISOs) and regional transmission organizations (RTOs) set up to oversee the regions did not impose any obligation on generation owners to secure firm supplies of fuel before bidding their generation into the market. If a generator failed to meet an obligation because they could not secure fuel – then another better-prepared generator would take their place and the unprepared generator would lose revenue and perhaps face a minor penalty.
That legacy results in a situation today where the majority of natural gas fired generation owners do not feel obligated, nor are they compensated to secure firm gas supplies before committing their units into the market. Because natural gas fired power generation demand has not previously been as high as it was last year and threatens to be in future years, most generators have been able to get away without paying for firm (guaranteed) transportation of gas supplies.
From the natural gas pipeline industry perspective if you want to secure gas supplies you need to buy “firm” capacity on the pipeline and most of that cost continues whether gas is scheduled or not. But the ISO’s do not reward generators for payments to buy firm capacity. The economic model that determines which generating plants are dispatched does not account for or reward any costs incurred by generators to obtain firm gas supplies. In other words the “market signals” from the system operator do not correctly reward good behavior by generators – in effect incentivizing them to avoid paying for firm capacity, and in many cases the penalties for non-performance are too minor to change behavior.
The issue comes to a head whenever the natural gas system is constrained to the point where generators cannot rely on the pipelines to provide them with secure supplies (as usually happens in the winter heating season). If natural gas powered generation is going to expand in coming years then the lack of firmness in gas supply represents an increasing threat to the reliability of electricity supply. Gas supplies are abundant, but the logistics to deliver them where needed in a timely manner are lacking.
At the Mid Atlantic meeting NERC stated that a uniform firmness requirement is better managed on a regional basis by the ISOs than by them at a national level. That is because the different regional system operators are organized using different economic incentives. There are also many ways that a generator can firm natural gas supply – including entering into firm transportation contracts with one or more pipelines, and investing in dual fuel capability.
It is also true that in markets where gas supplies are constrained i.e. where firmness is a problem - there is no short-term fix. If gas demand exceeds capacity then increasing the firm gas supply requires new capacity to be built. That takes time.
Against this background the regional FERC conferences advocated changes to scheduling practices that could be used as workarounds if firm supplies are not available in the short term. In the North East conference two approaches were suggested to reduce fuel cost risks for generators by revising wholesale electric market rules. The first is for the ISO to release day-ahead awards (committing generators to provide service) well in advance of the North American Energy Standards Board (NAESB) “timely nominations deadline” for scheduling gas pipeline deliveries. That deadline is 11:30 am central time each day. Such advance notice would allow time for generators to mitigate supply risks by scheduling their gas requirements as they become aware of generation commitments to the ISO. The second approach is to allow generators to bid hourly offers and intra-day re-offers to better reflect actual fuel costs in their bids on a closer to real time basis. If a generator could not get gas scheduled, they could use an alternate fuel and recover their costs in the revised bid.
The northeast regional technical conference was really about New England. The New England Independent System Operator (NEISO) operates the power market for the six New England states. The region has historically had fuel diversity but in the past 15-20 years significant gas fired capacity has been built. By 2011 51 percent of the power consumed in NEISO was generated from natural gas. Pipeline capacity is highly utilized in this region and often constrained (see The Mighty Algonquin). The result is that pipelines are meeting a higher portion of the region’s gas demand. Most of the gas fired power plants do not hold primary firm capacity on the pipelines, and rely instead on secondary and interruptible transportation (these terms are explained in “Feeding the Power Burn”) Fuel supply for natural gas generation is therefore inherently unreliable. Logically this dilemma can only be resolved by building more infrastructure to create firm capacity, but this will take time and require commitments from generators that have not been forthcoming in the past. They will do this only if they have mechanisms to recover those costs and not be at risk for them.
The Mid-Atlantic Region covers NY, NJ, PA DE, MD, VA, WV and OH States with the New York ISO (NYISO) and PJM ISO (the system operator for New Jersey, Pennsylvania and Maryland as well as other Atlantic Coast states – known as PJM) being the predominant system operators. The constraints in this region are markedly different than in New England. In PJM, there are many more natural gas pipelines, production and storage facilities so that generators do not have as much difficulty obtaining pipeline capacity as their NEISO counterparts. Regional LDCs and pipelines countered that the availability and flexibility that generators see today may not continue as gas fired generation grows. LDCs and pipelines both asserted that there is no link between the cost and usage of the infrastructure to generators and the true cost being borne by the LDCs and other firm shippers for serving generators. Also, while a generator might obtain firm capacity on an interstate pipeline system, that does not guarantee delivery to the generation plant. Getting to the plant may involve LDC pipelines that must also be compensated for firm transport.
The Mid-Atlantic group presented mixed views about scheduling. Since pipeline constraints are less severe and liquidity is higher in PJM, generators are able to acquire supplies and capacity later in the cycle. This is not the case in NYISO that is more like New England - where pipeline capacity is often constrained.
The Central Region conference included the Midwest ISO (MISO), Southern Power Pool (SPP) and the Texas ISO (ERCOT). Also represented were the states of AR, IL IN, IO,KS, LA, MI, MS,MO,NE,ND, OK, SD, and WI. MISO is the heart of coal fired generation country and experienced a large increase in fuel switching from coal to gas during 2012 (see Feeding the Power Burn). MISO is concerned about the availability and reliability of pipeline capacity to handle increased gas loads. Increases are expected because of additional fuel switching due to anticipated retirements of older, dirtier coal fired plants to meet emissions standards in the 2013-2015 period. Regional concern is focused on the heating season when LDCs use most of the gas pipeline capacity that they have under contract leaving power generators subject to constraints. This competition for natural gas supplies is not a problem in the summer. Concerns about reliability and security of supply have only arisen recently as a result of power switching and were not a problem historically. Another rub is that current pipeline shippers expressed concern about retaining the high quality and flexibility of their existing pipeline services should demand for gas in the power market soar.
The West Region covers natural gas and electric entities in the Western Interconnection that include AZ, CA, CO, ID, MT, NV, NM, OR, UT, WA, and WY. In this region – outside of California gas fired generators typically hold firm capacity on interstate pipelines. As a result there is less concern about gas-electric interdependencies.
California is organized uniquely because the interstate pipelines do not own pipe in the LDC franchise areas. They deliver gas to the LDCs. The LDCs deal with system expansions within their own state regulatory regimes and they build capacity based on projected growth rather than only on the firm contracted load basis that the interstates use under FERC rules. This allows interruptible capacity on the LDCs system to be closer to a firm service in reliability most of the time.
Gas demand volatility in the west is expected to increase since there is significant renewable electric capacity that needs to be backed up with gas fired generation when the renewable source is not available be it wind, hydro or solar. One suggestion was to develop more market area gas storage facilities, however, Arizona has been unable to attract developers to accomplish this. CAISO suggested that long-term electricity contracts might be required to finance storage.
The Southeast region includes natural gas and electric entities from an area defined by the corporate boundaries of Southern Company, Tennessee Valley Authority, and areas south of PJM and east of SPP and ERCOT and the states of AL, AR, FL, GA, KY, LA, MI, NC, SC, and TN. Generally speaking gas-electric coordination problems in this region are not as serious and gas reliability is not a major concern. Most generators either have firm gas transportation capacity, or dual fuel capability. System planning takes into account the fuel supply. However, many expressed the concern that gas tariff restrictions on “timely nominations” are not flexible enough to handle the daily and hourly swings experienced with gas-fired generation. They also questioned the no-bump rule for interruptible transportation and sought more flexibility on capacity release rules.
The one area in which all the participants in the regional conferences could agree to improve coordination was better communication between the electric and gas industries. Each region has evolved differently but all are engaged in efforts to improve communication – especially for emergencies and unplanned outages. Training sessions are being planned to increase both sides’ awareness in many regions. The big concern in communication is about compliance with regulations to avoid sensitive disclosures or undue discrimination under FERC Standards of Conduct. FERC could help by clarifying guidelines on information that can be shared, at least during emergencies.
Differences of approach between the gas and electric industries were highlighted in planning. Generally speaking, the electric industry does system planning on a more generic basis - studying demand growth and building infrastructure on a more speculative basis than the gas side without regard to fuel security. The interstate gas pipeline industry builds infrastructure to accommodate firm customers with the process well defined and managed by FERC. Even MISO which is studying the sufficiency of generation capacity in light of expected retirements and outages, does not yet appear to be addressing the longer term need for pipeline capacity in a timely manner considering the lead times required (see As Time Goes By).
Differences in approach to fuel supply reliability between the gas and electric industries are some of the most contentious and problematic issue that the FERC has to fix. Regulators and system operators on both sides have to agree on how firm capacity is paid for by generators and consumers. Otherwise further expansion of gas-powered generation will remain inherently unreliable. In any case firm supply requires new capacity to be built that will take time. The regional differences in market operations appear to make it difficult for national regulations to address firm gas supply. In the meantime different approaches to scheduling can help the industries work around the supply constraints. Improved communication between ISOs, pipelines and generators will also help resolve local issues particularly if the FERC clarifies its Standards of Conduct. Natural gas demand forecasts expect continued increases in gas powered generation but all that is vulnerable if the industry fails to resolve the supply issues quickly. FERC staff is monitoring the regional initiatives and will report to the FERC quarterly. The process continues.
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