New pipeline capacity out of the Appalachian Basin is helping alleviate bottlenecks from the prolific producing region and will continue to force production and market prices there and in Mid-Atlantic and Northeast market areas ever closer, according to FERC's Office of Enforcement (OE).
Capacity expansions are helping to erode peak winter spreads, OE said in a Winter Energy Market Assessment released Thursday (see Daily GPI, Oct. 15). Analysis by Federal Energy Regulatory Commission staff concluded that the spread between the Marcellus Shale production area prices and Northeast market prices could be more than halved this winter compared to last year.
"Staff does expect prices in these two regions to generally converge over the coming years as pipeline capacity increases connectivity," FERC told NGI. "This expectation is also predicated on other factors, including sufficient prices in New England to attract LNG [liquefied natural gas] imports, normal winter weather, and continued increases in Marcellus gas production."
The January-February spread, which soared to $10.93/MMBtu in 2014 and $12.76/MMBtu in 2015, isn't likely to come close to those heights in the foreseeable future, according to FERC's analysis. The agency is projecting a spread of $4.53/MMBtu in the coming winter, $2.12/MMBtu in 2017 and $1.39/MMBtu in 2018. By 2019, FERC expects the Northeast market area to have declined to $4.17/MMBtu, just 94 cents higher than the Appalachian production area, and to be trimmed a couple of cents further in 2020.
Price divergence during particularly constrained periods is still expected, FERC said, but it "will likely become a less frequent occurrence over time."
Regional transmission organizations have expressed confidence in their ability to achieve reliable operations this winter, though the independent system operators responsible for New England and New York "were more cautious," FERC said. Grid operators continue their efforts to improve gas-electric coordination, including development of a gas usage tool by ISO-NE, gas burn forecasts issued to pipelines by the California ISO, and a memorandum of understanding between PJM Interconnection and gas pipeline companies (see Daily GPI, July 31).
But the intraday fluctuations of the power generation industry continue to be addressed. "MISO [Midcontinent Independent System Operator], SPP [Southwest Power Pool], ISO-NE and CAISO, for example, experience two demand ramps during the winter months, one in the morning and one in the evening as customers turn on their lights," OE said. "The evening ramp is especially notable during the December and holiday period. These large changes can present challenges to power operators."
Significant amounts of solar generation compound the effect in California. Utility-scale solar capacity in the state reached 6,912 MW this year, with an estimated 3,000 MW of behind-the-meter solar available as well. California's three-hour ramp this winter could be even higher than the maximum of 9,131 MW achieved in winter 2014-2015, FERC said.
"Together, the need for gas-fired generation and the lack of dispatchable renewable generation increases the likelihood of price volatility and possible over or under generation conditions," according to OE. "This increased power ramp creates a natural gas ramp as power plants pull natural gas from pipelines to fuel their output." Last winter, CAISO and Southern California Gas encountered problems serving power generators’ gas demands, "at least in part because SoCal Gas lacked adequate tools to deal with low pressure situations." State regulators granted a low operational flow order (OFO) filed by SoCal Gas, "but it is unclear whether the OFO will be operable this winter."
ISO-NE -- the U.S. power market's largest grid operator -- uses natural gas to supply about half of its electricity during non-winter months, but is more reliant on a diverse fuel mix during the winter, when gas accounts for 35% of the region's power generation. Coal and oil-fired plants contributed 6% of ISO-NE's generation in 2014, but "are crucial for reliability" in winter months, contributing 24% of the energy in January and 18% in February 2015, FERC said.
The grid operator's Winter Reliability Program provides incentives for oil and dual-fuel generators to increase oil inventories, LNG to augment gas-fired generators' pipeline gas, and demand response. Still, "ISO-NE reports that the loss of any major non-gas unit or significant disruptions in gas supply and pipeline capability will create major challenges," FERC said.