When it goes online, Invenergy LLC’s Lackawanna Energy Center in Pennsylvania will burn clean natural gas — and have a clean hedge on its fuel supply.

The plant will receive natural gas supplies at prices mainly indexed to the same price of the power it will be selling into PJM Interconnection by virtue of a “power netback arrangement” with fuel manager South Jersey Resources Group LLC.

“…[W]hat that accomplishes for the generator is that when they get dispatched into PJM, they’re buying their gas based off the revenues they’re going to get, which is power prices,” said South Jersey Resources Group President Greg Nuzzo. “Lackawanna is purchasing that gas based off a power index, minus something, and they’re going to bid into PJM and receive revenue off that same index, so it’s a clean hedge from the merchant generator side.”

About 80% of the Lackawanna natural gas supply will be indexed to power prices, the remainder will be based off of a natural gas price index, Nuzzo told NGI. South Jersey has a 10-year agreement to supply fuel management services to the energy center, which is in Lackawanna County, PA.

The proposed facility is 1,500 MW combined-cycle gas turbine power plant near Scranton, PA. It is expected to be one of the most efficient power plants in the United States. Groundbreaking was last April, with commercial operations expected to begin in 2018. Once built, the plant will deliver power to the PJM energy market, which serves more than 61 million customers in 13 states and the District of Columbia.

The facility will burn up to 240,000 Dth/d at maximum capacity. Natural gas supplies will be purchased from Marcellus producer Cabot Oil and Gas Corp. (see Daily GPI, July 6). South Jersey will also manage 180,000 Dth/d of pipeline capacity for Invenergy on an existing Tennessee Gas Pipeline from the Marcellus.

“Our wholesale commodity business has benefited significantly from the abundant and affordable natural gas supplies located in the nearby Marcellus and Utica shale gas basins,” Nuzzo said. “The Lackawanna Energy Center contract expands our highly successful fuel supply management portfolio, as we have now executed 10 contracts to provide this niche service for the growing gas-fired merchant electricity generation industry.”

Nuzzo said only two of the 10 contracts includes gas supplies indexed to power prices.

Nuzzo told NGI that his company was approached by end-users with the idea of indexing gas supply off of power prices. South Jersey shopped the idea to some of its producer partners. Some of the producers liked the idea because it diversifies their own portfolios. “…[R]eally, it came from the end-user, but then the producers, after they got a better understanding of it, liked it as well,” Nuzzo said.

Back on the power side, such an arrangement gives a merchant generator greater assurance that its plant’s dispatch into PJM will be economic and will occur.

“Essentially that generator is going to get dispatched into PJM every single hour because if you’re buying gas off a power index and you’re selling power off a power index, you’re always going to get picked up by PJM…” Nuzzo said. The fear that natural gas will trade too high and make dispatch uneconomic is gone. “So this always guarantees the customer to be getting dispatched into PJM and getting revenues,” Nuzzo said.

Over the next few years, power generators’ reliance on Marcellus gas will be growing as more plants come online, Nuzzo said. His company has about six such plants in its portfolio slated to come online in the next few years, he said.