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Clash of the Titans: Gas-Electric Scheduling and Who Will Pay for More Pipelines

The seemingly intractable knot in natural gas-power coordination will only get tighter as the country increasingly relies on gas to produce its electricity. Despite government efforts to build consensus between the two giant industries, it appears they are not even close to a solution.

That was the take among a group of transportation service providers, power plant managers, grid operators and producers who came together on Wednesday at the Pennsylvania Independent Oil and Gas Association's annual conference in Pittsburgh on how interstate pipelines and gas-fired power plants can better learn to live in harmony. 

The panel was undoubtedly the buzz of the conference, especially after the nation experienced its coldest winter in decades that sent demand for gas to record-setting heights and forced price spikes that left power generators scrambling for gas. At the same time, some of grid operators, such as PJM Interconnection and ISO New England Inc., were left to fill any voids and direct electricity as they could.

The issue is becoming more imperative as more coal-fired and nuclear power plants are retired and generators look to gas to fill the gap.

Also looming large for the panel was a Federal Energy Regulatory Commission (FERC) proposal issued in March that would, among other things, shake-up the gas day by starting it earlier to allow power generators in four time zones an opportunity to enter the morning demand period with fresh gas nominations (see Daily GPIMarch 20).

"The electric industry is depending on us tremendously," said Appalachian Producer Services LLC President Robert Eckle, as he geared up to moderate the panel.

PennEnergy Resources LLC COO Greg Muse, whose company only recently started to develop a small swath of Marcellus Shale acreage in southwest Pennsylvania, reminded the group of how much potential there is for the industry in power generation. Using Energy Information Administration (EIA) statistics and other data sources, he said by 2016, gas would account for 40% of the electricity generated in the United States, up from 7% in 2007.

Similarly, growth in the Utica and Marcellus shales in Ohio, West Virginia and Pennsylvania, which are expected to produce a combined 25 Bcf/d of natural gas by 2020, could easily fulfill much of the demand, according to ICF International (see Shale Daily, April 25).

While New England has pushed for greater gas-power coordination in recent years, as its states grown ahead of the curve in gas power demand, the panelists acknowledged coordination was no longer just a problem for one part of the country.

"One of the comments I hear all the time is 'well isn't this just New England's problem?'" said Spectra Energy’s Vice President of Regulatory Richard Kruse. "I would say it's not just New England's problem; it perhaps started off that way, but it is spreading and we see concern being expressed in the New York ISO, PJM Interconnection and Arizona and Mexico, where they're concerned about it from a different perspective when renewables go off-line and they need quick access to natural gas."

Indeed, panelist PJM's Executive Director of Infrastructure Frank Koza said more than 90% of the power plants operating within PJM's system, which coordinates electricity in 13 states from New Jersey to Tennessee, will switch to burning gas in the next three years. EIA has estimated that by 2020 60 GW of coal-fired power would be retired across the country (see Daily GPIMarch 20).

"On the gas side, the gas day and gas scheduling timeline is standardized across the nation. We have one set of standards approved by FERC," Kruse said. "The challenge is that the electric industry is not standardized. We have multiple independent system operators (ISO) on a regional basis. They all operate at midnight local time; they all have their own scheduling timelines, and what has become evident is that to schedule gas for electric load, generators are often challenged to guess how much electricity they're going to be asked to generate or wait until the ISO tells them how much they need and then scramble to get it scheduled."

Kruse said the electric day must also be standardized in order to better align the differences between both industries, but he said it wouldn't be enough to resolve the issue completely.

"This issue is really a problem when there's not enough infrastructure. You've seen the dramatic growth in power generation on Texas Eastern in our M2 and M3 markets," Kruse said. "It's just been very dramatic. Unfortunately, for the power generation that's attached to our system, we've seen peaks up to 1 Bcf/d and we only have about 3 MMcf/d of capacity committed to serve power generation.

"When you need [gas] on a peak day basis with all your capacity being utilized, you're not going to get 1 Bcf/d out of Texas Eastern," he added. "You'll probably get 3 MMcf/d if the LDCs [local distribution companies] and producers are using their contracts. It's a contract issue."

Ann Scott, director of development at Tenaska Resources LLC, which manages natural gas-fired power plants across the country, agreed, saying that the electric day needed to be universal across the country. She added, however, that most power generators are unlikely to contract for firm transportation.

"A lot of these plants aren't owned by a utility. Some of the plants Tenaska manages are owned by private equity groups," she said. "They're purely merchant plants. They are just trying to optimize the best they can, keep fixed costs down and try to make money in the market."

Scott said Tenaska is in favor of moving up the gas day, which has rankled parts of that industry (see Daily GPIMarch 27). She also added that Tenaska remains adamantly opposed to requiring power generators to secure firm transportation.

"I keep an eye on that, especially when I'm out trying to market a new power plant. It's expensive, and I don't want to burden a buyer with another cost by requiring them to buy firm transportation."

Scott said Tenaska's model for buying and scheduling gas works for the majority of the year, but when it comes to the kind of peak days the company witnessed last winter, it falls apart and becomes a scramble. Price swings cost Tenaska over the winter, and she thought that with more pipelines in place, gas-power coordination would not be nearly as difficult.

"Here's the elephant in the room; even if you did all these things, even if all these solutions worked perfectly, the bigger problem in our opinion is that there's just not enough pipeline capacity to deliver the gas to where it's needed," said Koza. "In a world without barriers, the developers and others would build pipelines based on perceived business opportunity and not firm commitments."

Koza said in addition to some other regulatory changes that would facilitate better real-time information exchanges between power generators and pipeline operators, FERC needs to relax its rules for pipeline construction.

"What FERC is looking for is a long-term commitment. The problem with that is the generators don't know whether they're running two days from now, let alone seven years from now," he said. "I believe FERC needs to allow some pipeline construction and relax rules for development and allow operators to build without all these firm commitments. They at least have to relax some of those rules. We need more policy guidance on all this from FERC." 

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