The overall U.S. electric market appears stronger going into this summer, but FERC staff flagged four areas -- southern California, southwestern Connecticut, Long Island, NY, and Ontario, Canada -- that face potential outages and price hikes due to inadequate transmission and generation capacity, high demand, aging infrastructure and extended heat spells.
With the exception of the four trouble spots, "conditions faced by U.S. electricity markets at the onset of the summer appear to be stronger than last year, reflecting better underlying fuels conditions," said Steve Harvey of the Office of Enforcement in presenting the agency's first summer energy market assessment for the year at FERC's monthly meeting last Thursday.
"Southern California faces another summer of a tight supply in an area of fast-growing demand... The region remains heavily dependent on imports from northern California, the Pacific Northwest and the Southwest, particularly to meet peak demand. We expect net generation added in southern California since last year will barely cover load growth, though transmission upgrades may have marginally improved import capabilities," he noted.
"The area is vulnerable both to high-peak demand from periods of heat, and to unplanned outages of generation or transmission capacity needed to maintain imports," Harvey said. The California Independent System Operator (ISO) expects typical peak demand in southern California during the summer to be about 27,300 MW, with peaks under high-load scenarios of more than 29,500 MW. "Local generation...totals a little less than 20,000 MW and, at the peak, the ISO expects 10,100 MW to be imported -- or fully one-third of southern California's supply," Harvey said.
"In the high-load scenario -- due, for example, to sustained heat -- and with the sudden loss of local generation or transmission, the ISO might need to shed load through rolling blackouts in Southern California this summer," he noted. Although the prospect of an extreme scenario is "fairly unlikely," Harvey reminded FERC Commissioners that the state's "electric systems experienced combined heat and equipment failure in the past, and the likelihood of such a combination this summer is as great in Southern California as anywhere."
On a positive note, "the price effects of this tightness on customers [in California] are not likely to be as pronounced as one might expect" due to the fact that California regulators have called on utilities to contract for enough resources to meet peak demand.
The Southwest Connecticut market faces "extreme tightness" in its supply-demand balance this summer, according to Harvey. "Combined local generation and import transmission capacity are not sufficient to meet both expected demand and reliability requirements... Transmission capacity for imports now operates at its limit," he said.
He noted that no significant generation or transmission capacity has been added in Southwest Connecticut since 2004, and transmission improvements to allow for additional power imports aren't due to be completed until late 2009.
"The most important threats to electricity markets in Southwest Connecticut come from extended periods of summer heat and from unplanned outages of local generation or [from] import-related transmission. In addition, widespread periods of heat in the northeastern United States could result in limited supplies available for import into Southwest Connecticut. Overall, the fragility of the infrastructure into and within the region makes high prices and problems possible and maybe even likely," Harvey said.
He sees a mixed pricing picture in Southwest Connecticut this summer. "Continued high zonal prices due to congestion are likely as relatively expensive generation alternatives will have to be called on to meet load and reliability requirements." But he doubts the wholesale price signals will have much affect on retail electric rates, given that the rates for most Connecticut customers are not due to change until the end of the year.
Harvey also cited Ontario, which relies on U.S. markets in New York and Michigan to meet its demand, as a potential problem spot this summer. While the Canadian province has seen "modest improvements" in generation and transmission, "our view...is that Ontario has lost some of its already-tight capacity margin since last summer when it had to use emergency control actions aggressively to balance its peak demands."
Ontario "remains vulnerable to extended periods of heat as well as to unexpected outages," and "given its dependence on imports, it is also vulnerable to import restrictions if there is heat across the northeastern United States," he noted. Harvey believes that Ontario's supply-demand problems could spill over into the U.S. power market in the summer months.
"Demands for emergency energy could make balancing supply and demand in New York and in the Midwest more difficult and certainly more expensive. Ripple effects could be felt in PJM and New England as well. In addition, last summer Ontario disrupted imports frequently, causing a variety of commercial problems," he said.
"We've been concerned about New York City and Long Island for several years given the perennial tightness in electric supply and demand in those markets. In New York City, however, recent generation investments appear to have relieved some reliability concerns. Given the price of gas-fired generation at the margin, market prices are expected to remain relatively high in the city, though reserves appear adequate. On Long Island, however, supply-demand balances remain tight," according to Harvey. Long Island is vulnerable to unexpected generation and transmission outages as a result, he said.
Harvey also examined the prices for fuels that are used to produce electricity this summer. With the recent relative weakness in natural gas prices, "we've begun to see some of the first indications of fuel switching away from oil and towards natural gas... Over the past few weeks, gas delivered into Florida has averaged about 50% -- fully 1 Bcf/d -- above last year's levels. While Florida has seen some growth, a large part of this increase appears to be related to fuel switching away from residual fuel oil." FERC has noticed a similar trend in New York State but at lower volumes. "If it continues, oil may play a smaller direct role in electricity prices this summer than we've seen in the recent past."
Natural gas futures prices, while they've weakened recently, "signal upward pressures on prices through the summer and (especially) in the winter," Harvey said. "Likely to be pushing prices up are concerns about the upcoming hurricane season in the Gulf, continuing outages from hurricanes Katrina and Rita, and ongoing international uncertainty about the price of oil. Likely to be pushing prices down are current storage inventories, recent strength in injections and apparent production increases -- particularly relevant to the western United States."
He noted that western hydroelectric generation conditions have improved over last year. "Snowpack levels are quite robust. For example, as of May 12, average snowpack in the mountains feeding the Columbia River Basin was about 6% above historical average, while snowpack in California was about 66% above average."
Coal stockpiles remain below their five-year average for the first quarter of the year, but are well above last year's levels and may have reached, at the end of April, levels above those in 2004, said Harvey, citing estimates of the Energy Information Administration. 'Railroad disruptions and strong coal demand for generation in the face of high natural gas prices have driven lower stockpile levels for the past few years. While worth watching, staff's view is that coal stockpiles are likely to continue building," he said.
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