The gas surplus and sub-$2-$2.50/MMBtu prices for natural gas will put downward pressure on power prices this summer, and step up the switching of generation facilities from coal-fired to gas-fired, according to FERC's "Summer 2012 Energy Market and Reliability Assessment" report, which was released Thursday.
The reserves of generation capacity to meet normal electricity demand this summer appear adequate, but there are three potential trouble spots -- Southern California, Texas and Boston, according to the report by the Federal Energy Regulatory Commission (FERC) staff. Summer outages could cause price volatility in these power markets, but in general the market will be dominated by low natural gas prices.
"The most prominent market driver for energy markets this summer will be the cost of natural gas, which has fallen to prices last seen a decade ago...Gas prices at the recent lower level can be expected to have a significant impact on electric markets." FERC expects the gas surplus condition to continue through the summer, causing gas prices to stay near their present levels.
In addition to the low prices, "the ability of the natural gas-fired plants to obtain sufficient fuel does not appear to be a significant factor or a market concern during the upcoming summer. In particular, capacity in long-haul pipelines is generally sufficient to avoid disruptions in the use of natural gas for electric generation for this summer," FERC noted.
The agency noted that come fall, in addition to day-to-day fuel switching, some Eastern Interconnection utilities have announced that they will retire their older fossil fuel generation units.
Pointing to the possible problems this summer, FERC staff said that twin units of Southern California Edison Co.'s 2,200 MW San Onofre Nuclear Generating Station (SONGS) in San Clemente, CA, which have been shutdown for three months, warrant close attention if they should remain offline during high-load periods this summer (see Daily GPI, March 29). David Andrejcak of FERC's Office of Electric Reliability indicated that the two units could reopen in early June. However, the Los Angeles Times reported earlier this month that the problems at the facility are serious enough that it's unlikely it will be able to operate at full capacity when it reopens.
The situation in Texas may be strained if the state experiences another hot summer like last year, according to the FERC report. The Electric Reliability Council of Texas (ERCOT) projects that load could exceed projected capacity (70 GW) during an extreme heat wave with higher-than-normal forced general outages, the report noted.
If weather conditions are normal, "New England's electric power supplies are expected to be adequate this summer. However reduced and uncertain supplies of liquefied natural gas to fuel [Exelon Power's Mystic Generation Station in Charlestown, MA] could result in an inadequate supply to the Greater Boston area during extremely high-loading periods and multiple contingency conditions," the report said.
"ISO New England is reaching out and working with asset owners in North East Massachusetts and the Boston area to alert them to the situation and is working with local generation and transmission companies to develop special operating plans that can be used to manage a shortage situation.
Responding to staff's assessment, Commissioner Phillip Moeller said that he was a "little concerned that it's a tad rosier than I feel." He cited the challenges in the power market this summer -- tight reserve margins in ERCOT; and reliability concerns in Boston and Southern California.
"I probably wouldn't call it a rosy picture, but I would call it a realistic picture," Andrejcak said.
As a result of the closure of the SONGS units, Southern California "may see elevated prices compared to Northern California and neighboring regions, especially during periods of high demand. With the region reliant on imports, the removal of the two [San Onofre] units means the region will need to rely on plants with higher costs. Greater price volatility typically occurs under such situations," FERC said.
Two mothballed units at Huntington Beach, CA, have been reactivated, and will provide additional capacity in the Los Angeles basin and support additional transfers into San Diego, the report noted.
The ultimate impact [of the San Onofre closure] on customers should be at least partially buffered, with the local load-serving entities having physical capacity, purchase agreement and congestion revenue rights. Few customers pay bills based on the real-time price, but high real-time prices work their way into day-ahead prices and longer-term instruments if they are sustained," the report noted.
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