With New England facing reliability challenges due to a shift in the generation mix, it would help for FERC to improve the operational alignment between the electric and gas systems, according to ISO New England (ISO-NE) President and CEO Gordon van Welie.
Discussions are underway with ISO-NE’s stakeholders and the RTO will make multiple filings at FERC over the next 12 months to address the components of ISO-NE’s action plan to address the challenges, van Welie said in prepared testimony before a March 19 hearing of the U.S. House of Representatives Energy and Commerce Committee Subcommittee on Energy and Power. The hearing was titled, “American energy security and innovation: The role of regulators and grid operators in meeting natural gas and electric coordination challenges.”
ISO-NE is working with the New England states and its stakeholders to develop market changes to provide the economic incentives necessary to ensure that generators have adequate and reliable fuel supplies, including changes to the wholesale markets to improve electricity price formation, improve the ability of generators to reflect the true cost of fuel in their offers to sell electricity and strengthen performance incentives for generators and demand resources.
Other changes include expanding the amount of resources held in reserve to respond to the sudden loss of generation due to a system contingency, van Welie added.
Natural gas predominant fuel to produce electricity
In the past decade, natural gas has become the predominant fuel used to produce electricity in New England, but limitations of the current market design and the consequent inadequate fuel arrangements by natural gas and oil-fired generation have led to serious reliability threats to the bulk power system, van Welie said.
The region has seen a major shift in its generation fleet, moving from a mix of oil, coal, nuclear and natural gas generators to a system where 52% of the region’s electricity is produced by natural gas-fired power plants and 31% is produced by nuclear power.
Additionally, coal and oil generators are retiring while a diverse set of renewable and demand resources are being introduced.
“Wholesale electricity prices are now primarily driven by natural gas-fired generation, but the wholesale electricity market design currently does not provide adequate incentives for generators to provide electrical energy when called upon by the ISO during stressed system conditions, and in particular for gas generators that have not made adequate and reliable arrangements for fuel supply,” van Welie added.
This shift has provided economic benefits for New England, he said, adding that the investment risk for new power plants has shifted to private investors and electricity consumers in the region have benefited from the recent low prices in the natural gas market.
Industries increasingly interdependent
He also noted that while the natural gas and electric industries operate under different regulatory, contracting and operational structures, they are increasingly interdependent.
Electricity supply and demand must be balanced on an instantaneous basis and problems on the electric system require immediate action, often through the operation of fast-responding gas generators. However, he added, if generators have not contracted for gas before the electric operating day, the gas system may not be able to respond to the real-time, instantaneous demands of the electric system.
“This is particularly acute in New England, where the region has a significant reliance on ‘just in time’ interruptible fuel delivery and it is clear that the gas system is inadequate to meet the demands of electric generators during peak periods,” van Welie said.
For power grid reliability to be maintained, there must be adequate levels of fuel inventory within the region, either through storage or reliable transportation arrangements so that the electric sector is ready to respond whenever called on by the ISO.
Those arrangements must be incentivized through changes to the wholesale electricity market design, so as to provide strong economic signals for generators to perform when needed, he said, adding that it is likely that this will result in incrementally higher wholesale prices in order to pay for the improved reliability that is sought.
The region realized an almost $7bn reduction in wholesale electricity costs over the past five years as natural gas prices fell to record lows in 2012. “New England would benefit by using some of this savings to invest in infrastructure to expand the region’s access to low-priced natural gas and strengthen the reliability of a power system that will become increasingly dependent on natural gas,” van Welie added.
The region cannot access the full benefit of domestic shale-gas deposits because of pipeline constraints leading into New England from the west and south.
The interstate natural gas pipelines operate under a business and regulatory model that requires a long-term firm commitment by the pipeline customer. Since the current wholesale electricity market design does not provide gas generators with the necessary performance incentives, generators often do not make arrangements to ensure that they have an adequate and reliable fuel supply for their facilities’ output, van Welie added.
The market-based solution is to strengthen the economic incentives in the wholesale markets to encourage generators to make adequate and reliable fuel arrangements so that they are ready to respond to the ISO’s call to produce electrical energy when required.
However, the natural gas generators generally have a short- to medium-term financial horizon and are a diverse group with diverse market interests, and thus are a group of “fragmented buyers,” who are unlikely to enter into long-term fuel arrangements on a large scale. This, van Welie added, does not align with the long-term commitment preferred by investors in gas pipelines and gas storage infrastructure.
The New England states are studying the ability of the natural gas pipeline system to satisfy heating and electric market demand in the region, he said, noting that those efforts are intended to provide information to policymakers and market participants on a range of possible solutions to future natural gas infrastructure needs.