NAESB and Electricity, together with Gas in Perfect Harmony?

Power generation has surged as a market for natural gas in recent years, and gas-fired generation has become the largest single source of generation capacity.  So coordinating the two industries, or “Gas-Electric Harmonization” has been around as an issue for quite some time.  But while pipelines, generators, and shippers have been arguing about a host of complicated (and pretty boring) issues for about 20 years, the subject has really heated up lately, and has the potential to cause some major changes in both industries, changes that could particularly have an impact on the market for Northeast gas supplies.  The spark for the latest flurry of activity is a proposed rule issued in March by the Federal Energy Regulatory Commission, or FERC, dealing with what they’ve been hearing from the electric industry.  In today’s blog we review what FERC is trying to do, and how they’re using the North American Energy Standards Board, NAESB, to reach an unprecedented level of synchronization and commonality between the gas and electric industries. 

What are the generators’ complaints?  Basically that pipeline nomination cycles, and the start of the “gas day” when your nomination takes effect, don’t fit the bidding and consumption pattern of electric markets.  That pipeline nomination cycle was standardized nationwide about 15 years ago, through the efforts of the Gas Industry Standards Board, which later became the North American Energy Standards Board, or NAESB.  For most participants in natural gas markets, the standardization was very helpful, and the structure has been manageable.  But generators have become more and more vocal that they’d like to see changes.  All of this has come to a head over the last two years, and reached a crescendo at the end of this year’s severe winter.

Whether or not the gas industry had standardized its timelines with the blessing of regulators, since gas is a “just-in-time” fuel that you can’t store on-site very easily, the generators have been complaining that sooner or later the gas wouldn’t be there when they needed it.  Then this winter, at least some of the organized electric power market (regional transmission organization - RTOs) managers specifically pointed at these timeline issues as being a contributor to the price spikes that were experienced in their regions.

So on March 20, FERC took the bull by the horns and said, “if you don’t work it out, here’s the answer”—they issued a Notice of Proposed Rulemaking or “NOPR,” proposing new rules for pipeline nomination and scheduling (FERC Docket No. RM14-2).  Get used to hearing about the “NOPR” if you are active in or around the gas or electric industries—most pronounce it “Noper,” although some make it rhyme with “Oprah,” but it basically means “what FERC is about to do to you or for you.”  If the NOPR goes into effect as a final rule, it would change all the timing of how everyone nominates and confirms and schedules transportation on natural gas pipelines—not just the electric industry, everyone.  FERC had been deeply examining the relationship between the two industries since a series of regional technical conferences in 2012, so in many ways was ready to act in response to any perceived problems—and did so here.

To say the FERC got everyone’s attention is an understatement.  Changing timelines and everything that feeds off those timelines means that everyone participating in the industry has to redo all their back-office processes.   And it means that where physical changes have to be made when nominations change, but those changes can’t be made remotely, field workers have to expect some new schedules.  The most significant of FERC’s proposed changes is to move the start of the “gas day” —that’s the time when any change in a daily nomination will take effect— up from its longstanding 9 AM Central Time to 4 AM Central, in order to allow gas nomination changes to better match the ramp-up in electric loads.   The electric industry has long explained that if they’re right at the end of the prior gas day when everyone turns on the lights, heat, and computers, it is very difficult to have enough gas scheduled to supply the ramp-up of the generators.  Basically, the flowing volume on, say, Wednesday morning is the tail end of the daily amount that was nominated in the middle of the day on Monday—a day before the selection of generators for Wednesday took place.  On top of that, generators explain that at the tail end of the gas day they are often balancing flows to make up for higher takes earlier in the day, which restricts their availability of supply right when they need it (this explanation doesn’t get a lot of sympathy on pipelines where shippers are supposed to take their gas at even hourly rates, but nonetheless it’s a fact).

Why should the gas industry care what technical foibles the electric industry manages to run into?  Well, very simply, it should care for two reasons:  First, power generation is the number-one immediate growth market for the nation’s abundant natural gas supplies, but if anyone can claim that gas is not reliable because pipelines  won’t deliver it the way it’s needed, there’s a real risk of shrinking that market.  Second, there is already a huge amount of gas-fired generation on the national pipeline grid—from 1990 to 2013, 71 percent of all new generation capacity added was gas-fired—so failing to coordinate the way this major load is served could well mess up service for lots of pipeline customers. 

The bottom line is that although in some cases, like in New England, they simply need more pipeline capacity to serve the generators  (see Should I Store or Should I Burn), if in other cases things aren’t working properly just because of administrative procedures, both industries better get those admin processes fixed. For example in the huge PJM Interconnection, covering all or some of 13 Mid-Atlantic or Midwestern states and the District of Columbia, business-practice friction has been labeled by many as the largest gas-electric problem experienced this winter.  This PJM statement is particularly important to the natural gas market, since PJM is where (a) a great deal of coal retirements are supposed to be replaced with gas, and (b) the power market can be fed by short-haul from Marcellus and Utica.  So any issues that get in the way of growing power-generation use of gas in PJM could have a significant impact on Marcellus and Utica prices.

In any event, upon observing all of this, FERC threw its proposed changes out there to see how the world would react.  From the responses we’ve seen so far, it seems like most producers haven’t been all that happy about the change in the gas day.  The stated concern is that not many wellhead facilities are remote-controlled, so someone actually has to go to each well and make physical adjustments when changes are made.  With the new rules, that would be happening sometime between 2 AM and 4 AM Central, or 1 AM to 3 AM in the Rockies, or midnight to 2 AM in the far west.  As compared with today’s schedule, where the earliest anyone has to be somewhere is between 5 AM and 7 AM in the west, the argument goes that this could mean a whole lot more midnight drives on dirt roads or no roads in the middle of nowhere, and it could mean that critical operations where safety is paramount would be carried out around the time other people are leaving the bar, not in morning daylight.   There are plenty of dedicated well-operation technicians, and they are no stranger to difficult operations, but the producers argue that the FERC’s proposed 4 AM Central Time start of the gas day would impose an unnecessary safety issue across the industry. 

We’ve also heard from other parties who have problems with the time, such as small municipal utilities that have relatively more manual operations, and there is still a great deal of argument around other changes, such as the deadlines for nominations, the number of nomination changes that can happen during the day, the intervals between nominations and scheduling announcements (telling you whether you got what you asked for), when and how firm nomination changes can “bump” interruptible service off the pipeline, etc. 

This table gives a quick snapshot overview of the existing nomination timelines and what FERC has proposed.  For each nomination cycle, it shows the existing standard, followed by the NOPR provision.  We have only focused here on two times:  when a nomination has to be in, and when the flow change will be effective.  Everywhere that the NOPR proposes a change, the time is shown in red.  There’s a lot of red.