New England must acknowledge the significant role that the natural gas transmission system plays in its electricity system, and the gas and electric industries “must make adjustments to ensure the reliability of both systems and the efficiency of both markets,” according to a draft white paper recently completed by independent grid operator ISO New England (ISO-NE).

The economic, environmental and operational benefits of New England’s increased gas generation — brought about primarily by low gas prices — come with associated costs in the form of reliability risks, according to ISO-NE. Those risks, which include pipeline limitations and use of non-firm contracts, “have assumed greater urgency as gas dependence leads to more frequent and severe challenges to ISO-NE’s ability to operate the system reliably,” ISO-NE CEO Gordon van Welie said in a cover letter accompanying the report.

In 2010 ISO-NE began to address risks to the bulk power system and wholesale electricity markets, which included increased reliance on natural gas-fired capacity (see Daily GPI, Oct. 10, 2011). Since then, “addressing this risk has become a priority, given the reliability challenges that are already in evidence,” the draft paper said.

Gas dependence in the region “is a reality and is increasing for a number of reasons, including low gas prices. Given these low prices, generators are using Marcellus Shale gas where possible to reduce their costs, which, in turn, results in low wholesale prices that ultimately benefit consumers.”

In 1990, oil-fired and nuclear generating plants each produced about 35% of the electricity consumed in New England, while gas-fired plants accounted for about 5%. By 2011 oil-fired plants produced just 0.6% of electricity consumed in the region and 51% came from gas-fired generation. The low price of gas has resulted in dramatic savings, with total wholesale market costs dropping to $7.6 billion in 2011 from nearly $13 billion in 2008. But the lower cost and other benefits of the electricity grid’s growing gas dependency “come at a cost,” ISO-NE said.

“Specifically, given current and anticipated levels of gas usage, potential gas unavailability threatens the reliability of the electric system due to the limited-capacity pipelines used to transport gas, potential gas supply interruptions, and the ‘just-in-time’ nature of the resource.”

ISO-NE recommended long-term changes to the forward capacity market (FCM) and forward reserve market (FRM) to create better incentives for generators to perform in accordance with their operating characteristics. “Generators may achieve this performance by making alternative firm fuel arrangements, such as investing in oil inventory, or entering into firm gas transportation contracts. The latter may, in turn, encourage pipeline expansion, thereby addressing current pipeline limitations.” Until the FCM and FRM changes are in place, ISO-NE proposed to engage in a supplemental procurement to ensure that oil and gas generators maintain adequate levels of firm fuel capability.

ISO-NE also proposed enhancements to the flexibility of the electricity markets by changing the rules to permit generators to modify their offers intra-day to reflect fuel costs, and by moving the timing of the day-ahead market to better coordinate with natural gas industry timelines. “These changes are intended to address the divergence between generators’ commitments and gas nominations, which often result from the uncertainty generators face in acquiring gas before they know their generation commitment and dispatch,” ISO-NE said. “These changes will also provide the ISO control room with necessary information on a timely basis to operate the power system reliably.”

And ISO-NE recommended more information be required from generators regarding their fuel status and better information be provided on natural gas pipeline maintenance.

ISO-NE oversees a six-state region interconnected by more than 350 generators and 8,000 miles of high-voltage transmission lines. New England has more than 32,000 MW of capacity and is tied to neighboring grids in New York and Canada through 13 different interconnections.

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