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Northeast Grid Operators Ink Reliability Pact for High Gas Demand Periods

June 27, 2005
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ISO New England (ISO-NE), the New York Independent System Operator (NYISO) and PJM Interconnection last Thursday said that they have agreed to collaborate to ensure electric power system reliability in the event of constraints on the natural gas supply system.

The three northeastern regional grid operators will coordinate operations and practices and share information and technology during periods of extreme cold weather and/or abnormal natural gas supply or delivery conditions. Natural gas-fired electric generation accounts for much of the generating capacity in the three regions.

"As the electricity industry grows more dependent on natural gas as a primary fuel source for generating resources, it's critical the three northeast grid operators coordinate closely to ensure reliability is maintained when extraordinary power system conditions occur," said ISO-NE President Gordon van Welie. "This memorandum of understanding provides the framework for this coordination."

"The MOU will allow the Northeast to show best practices to refine our operating procedures so we may verify natural gas supply availability for electric power production and take proactive measures within our respective regions," said NYISO President Mark S. Lynch.

"The degree of coordination we are voluntarily initiating with this MOU is practical only through independent regional grid operations," said PJM President Phillip Harris. "Consumers throughout our areas will benefit from enhanced system reliability, planning and efficient operations."

Periods of extreme cold weather place heavy demands on both the electric and natural gas transmission systems as energy consumption increases. Sometimes, the resulting delivery restrictions on the gas pipeline system can limit the ability of gas-fired generation to produce electricity.

New England came within a whisker of experiencing rolling blackouts during a severe cold snap that lasted from Jan. 14-16, 2004. During the cold snap, gas demand soared and gas prices shot to astronomical levels. Gas pipelines were forced to curtail gas flowing on interruptible transportation (IT) and some power generation companies lost or sold their fuel because they had purchased IT rather than firm.

Much of the generation built in the Northeast in recent years is natural gas-fired. In 2004, gas-fired generation comprised 40% of the generation capacity in ISO-NE and 28.4% in PJM. Because a large percentage of New York's gas generators also use oil, it is estimated that 30% of electricity generated within the NYISO control area uses natural gas as its fuel source.

Meanwhile, Energy Security Analysis Inc. (ESAI) on Thursday noted that it has issued its latest Quarterly Northeast Energy Market Watch, which focuses on the dynamics of coal pricing in the Northeast power markets.

"Coal dominates power pricing during the off-peak hours in New York and New England and coal plants are often on the margin during a portion of the on-peak hours in PJM," said Paul Flemming, manager of power and gas services for ESAI. "As a result, coal prices play an important role in the overall energy pricing dynamics in each of the three Northeast markets."

While rising oil and natural gas prices have caught the attention of industry and consumers alike, coal prices have also been marching higher over the past few years, albeit more slowly than oil and gas. "Our studies indicate that there are a lot of pricing pressures for mine mouth coal, including escalating transportation costs, increasing environmental costs and competition from more competitive power plant technologies and renewable energy," said Flemming.

In analyzing these costs for coal powered plants in the context of the very competitive Northeast energy markets, ESAI has developed a method for determining the competitive ceiling price for Eastern coal. "Basically, the price of coal has to be low enough over time to keep the mid-range efficiency coal plants competitive with the high tech gas fired combined cycle units."

In its report, ESAI develops the theme that coal prices will be dictated by competitive gas economics and increases in emissions trading credits. "If carbon trading comes into effect in the U.S., competitive pressures will force much of these costs back to the mine operators and the price of mine mouth coal will have to drop," said Flemming.

As new LNG terminals are built, this increased gas supply will moderate natural gas prices by introducing a significant source of supply that will make up for production shortfalls. Ultimately, this will also keep a lid on coal prices, according to ESAI. There is a tremendous amount of idle gas-fired capacity waiting in the wings to take on the older, inefficient coal plants should coal prices rise too high relative to gas, it added.

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