Expected tight power supplies and transmission constraints in California, New York City, Long Island and southern Connecticut, and high and volatile energy prices across the board highlighted a summer assessment by FERC’s Office of Market Oversight and Investigation (OMOI) at a regular Commission meeting on Thursday.
“This summer may be difficult for energy consumers,” OMOI staff told the full Commission. “Fuel prices are high at the moment — oil price, coal prices, gas prices. Partly as a result, electricity prices are forecast to be high for the summer. Fortunately the Commission has taken some actions post-2000 and 2001 that we hope will help prevent a recurrence of some of the misbehavior that happened in the past in high-priced environments.”
Commissioner Nora Brownell responded, “Let’s hope that nobody is that dumb to [try to] take advantage of the dysfunctional situation this summer.”
One of the areas of greatest concern is the California power market, where supplies during the peak demand period are expected to be tight. “The economy is rebounding in California, load growth is picking up and the California ISO has forecast a reserve margin that does not have a lot of excess above the basic minimum of operating reserves,” staff noted. It forecast about a 1,600 MW surplus relative to a demand forecast of 44,400 MW.
“And that’s under the most likely conditions.” Under more difficult conditions with higher than expected demand or less supply, the situation could be more of a concern, staff noted.
A major issue is that power supplies in California are not evenly distributed relative to demand. Staff said it was most concerned about the situation in Southern California, where congestion occurs on a regular basis on the transmission system as imports are relied upon from Arizona and Nevada to meet in-state demand.
Early last week, the Palo Verde 1, 2, and 3 units in Arizona, which produce 3,900 MW of nuclear power, were knocked off line by a grid “disturbance,” leaving Southern California and southwestern markets scrambling to make up for the lost supply all week (see related story). Palo Verde daily prices rose to more than $75 Monday from $40 the previous Friday, while NP-15 hit $68 on Tuesday from prices in the low $40s a few days earlier. Such an event during a peak demand period in August could have serious consequences for the western power grid.
Other factors likely to have a detrimental impact in California this summer include the de-rating of the California DC Intertie and low hydro supply availability. Hydro is expected to be only 75-80% of normal by August.
Staff said the California Independent System Operator is working to raise public awareness of the situation to boost conservation efforts and is expected to limit maintenance outages, but there’s enough going on to warrant close monitoring by FERC as well.
Meanwhile, power prices in some other locations also are expected to be higher than last summer. Last June, PJM West prices averaged about $40 and hit $52 in August. But this June, PJM West was at $42 and the projections for peak summer prices are significantly higher in the mid-$70s.
Prices for power generation fuels are higher and are expected to remain high, staff noted. Gas prices were above $6 last June but then fell in response to cooler weather. This June, natural gas prices also are above $6 but they are expected to stay above $6 for the balance of the year based upon multiple factors, such as concerns about warmer weather this summer, the hurricane season and the high price of alternative fuels, OMOI said.
Coal prices also are at their highest level in the last six years. And prices of crude oil and fuel oil have been in an uptrend and are expected to continue rising or remain firm through the summer.
Regarding the natural gas situation, OMOI staff said there are concerns about “what appears to be very uninspiring U.S. production capacity numbers. There are disagreements about where production stands.” Nearly all the experts agree that production is not growing much if at all and may in fact be declining. There’s a lag in production data that makes a complete assessment difficult, staff noted.
The Energy Information Administration reported that 2003 production was up 0.6%, but many market analysts say there was a 2-6% drop in domestic production last year, staff said. Canadian production appears to have been flat last year and demand in Canada is growing, which is reducing exports to the United States. Meanwhile, U.S. production in 2004 could fall 3%, according to analysts.
Last summer cooling degree days were below the five-year average and normal. Even a reversion to normal weather this summer will increase demand, and if the forecasters are correct and hot weather for the eastern United States does occur, it will increase demand and price volatility, staff told the Commission.
FERC staff expects gas storage injections to remain a high priority this summer “with little regard for price.” The industry started out the injection season in April with much higher levels of working gas than in April 2003, which will mean less demand for injection this summer. However, staff still believes there will be substantial competition for supply between storage and power demand, which could increase price volatility.
The New York City and Long Island power markets remain areas of concern because of constrained load pockets there, staff said. “We’ll be keeping an eye on them this year. The capacity situation in New York is a little better than it has been for the past few years. But it’s offset somewhat by the possibility of stronger than expected load growth given the economic growth that has been seen in the city in the first quarter. There is a de-rating of a transformer in PJM that could affect imports into New York City from PJM. As always reliable operations in the metropolitan area…[are critical].”
Staff also noted that there are some “policy issues” that will affect the power markets in New York. There is line replacement work on a cable that crosses Long Island Sound at a time when the Cross Sound Cable system has been shut down and blocked from providing service. There’s a possibility that there will be “scarcity pricing” this summer if loads get high.
Other areas of concern that staff mentioned include the following: expected low hydropower supply in the Pacific Northwest; high load pockets in the Southwest; stranded merchant power generation in the Southeast; the integration of Commonwealth Edison in to the PJM system; and scarcity pricing that may be activated in New England due to continuing congestion in southwestern Connecticut and the impact of expiring firm contracts with Hydro-Quebec.
On a more positive note, OMOI staff said that the energy price reporting system to index publishers has undergone significant improvement. “The information that we have received through the surveys…indicate that the company processes are improving in terms of the steps taken to assure that accurate information is delivered to index publishers and also that the index publishers have taken a number of steps to improve quality assurance and also the amount of information that is provided to the market…
“[The new] standards of conduct are not effective until September but companies are taking action to get these processes in place to meet the requirements of the standards of conduct. So significant efforts have been made to meet [the Commission’s recommendations].”
Â©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.
© 2021 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 1532-1266 |