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Extreme winter conditions create operational challenges, higher electric prices

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Extreme winter conditions earlier this year created operational challenges and electric prices that were significantly higher than normal.

A review of past winter events raised market and reliability concerns that coordination between the gas and electric industries could be enhanced. Many questions have been raised: is there sufficient pipeline and/or gas supply capacity to meet the growing reliance on gas-fired generation; are scheduling rules in either industry precluding efficiencies that would enhance reliability and/or lower costs, etc.

Many of these questions fall under federal authority, and as such, the Federal Energy Regulatory Commission has issued some proceedings/rulings to address them. The discussion below does not address every initiative being discussed, but attempts to provide some context for what are some key issues being considered in the areas that have Regional Transmission Organizations (RTOs).

One of the biggest challenges facing the gas/electric sectors is that there’s a single, standard gas clearing day (time) and nominations cycle, while each RTO has its own schedule.

FERC issued a Notice of Proposed Ruling (NOPR) that requires, among other things, that the North American Energy Standards Board (NAESB) examine whether: (i) certain practices in the gas industry, such as nomination periods should be modified, and (ii) the gas day should be moved forward (earlier) in order to ensure that generators can physically get their gas in the morning ramp up period. “Ramp up” times are when load starts coming on in the morning and generators are turned on or their output is increased, typically around 5:00 a.m. ET on the east coast. Currently, the gas day ends at 10:00 a.m. ET. Some generators have stated they can’t get their gas during morning electric ramp up times. One of the likely causes of this is that the generators have burned through their gas nomination earlier in the day. The theory is that by moving the gas day back to an earlier time, these generators may burn through their gas, but it would not be so critical to system reliability. That’s because unlike today, the “new” gas day would commence around or just prior to the start of the ramp period in the early morning, and it wouldn’t matter if the generator had burned through its gas toward the end of the terminated gas day, which would end during the off-peak period in the middle of the night.

NAESB is working towards a response to the NOPR. However, many stakeholders are concerned that these proposed changes, if implemented, will undermine the well-functioning gas markets and not fix the problems in the electric industry. Of concern is that changing the gas timelines to accommodate one RTO may not be of help to another and there may be unintended consequences in nomination and scheduling gas as a result of the change in the gas day start time.

Another FERC issuance regarded RTOs’ dispatch timelines.

FERC asked the RTOs to make compliance filings to demonstrate whether their clearing times for their markets align appropriately with the gas markets. For example, the New York Independent System Operator (NYISO) accepts bids at 5:00 a.m. ET, and then announces its dispatch schedule at 10:00 a.m. ET. While generators don’t have price discovery prior to submitting their bids, the NYISO releases the dispatch schedule in time for those generators to know and nominate the gas quantity and hours they actually will need to run the next day.

PJM, on the other hand, closes its bidding period at 12:00 p.m. ET, and announces awards at 4:00 p.m. ET. In that case, generators have price discovery prior to submitting their next day bids, but by the time they know their actual quantity and run hours, the gas nomination period has terminated. While there are opportunities to nominate after such termination, supply may be tighter or more difficult to procure than during normal trading cycle. Thus, typically the gas generators nominate their next day gas before they know their actual quantity and run hours. This creates pricing inefficiencies.

One perspective is that the RTOs would open their bidding process when price discovery in the gas market is optimal, and then publish dispatch schedules by 1 to 1 ½ hours prior to the Timely Nomination Deadline. This would allow generators to nominate their gas quantities accurately and eliminate price inefficiencies.

Moving the Timely Nomination Deadline forward to keep it open for a longer period, as is being discussed in NAESB, would complement this approach. However, the RTOs are concerned that they don’t have the technology to clear bids in this “accelerated” time frame (i.e. before the Timely Nomination Deadline), and it will take a significant investment to upgrade their software.

Another big challenge is that while FERC has jurisdiction over interstate pipelines, it doesn’t have jurisdiction over the many Local Distribution Companies (LDCs) that control intra-state gas. The LDCs take gas delivery from the interstate pipelines and then, through a separate contractual relationship (and physical pipeline), deliver the gas to generators that are “behind the city gate,” (i.e. generators with delivery points off of interstate pipelines and within an LDC territory). The LDCs must prioritize gas delivery during extreme stresses on the system, and sometimes curtail gas supply for “human needs.” Thus, a number of generators who relied on LDCs for their gas found their supply curtailed during the extreme cold weather. So, even if certain changes were made to the gas/electric rules, they could not be imposed on LDCs, which are state jurisdictional.

There also appears to be a misperception that gas can’t be bought over weekends and holidays. 

In fact, gas is available on a daily basis, including weekends and holidays, but the market is less liquid. Therefore, many generators prefer to lock up their weekend/holiday supply on a Friday, and then won’t commit to run on the next business day unless they can run through the weekend, when they may not be the most efficient unit that should be running. Clearing up the misunderstandings around how the gas market works, and perhaps making the weekend markets more transparent by having specific daily products, should address this concern.

Market Incentives

Finally, the RTOs with capacity markets are likely to consider taking additional steps to ensure that gas generators that clear the capacity market perform when needed. These would include rewarding units that have storage and dual fueled capability with higher capacity prices, and revising performance incentives and penalties to better align performance with peak day.

There is no question that additional investment will have to be made to ensure better coordination. It is Direct Energy’s belief that investment in a robust capacity market for reliability purposes and updating RTO clearing engines to ensure bidding and release of dispatch schedules occurs when liquidity is highest in the gas market, will help prevent incurring the kind of costs seen in the winter of 2014.

Posted: May 28, 2014