Natural gas: Good news and bad news

A growing supply is driving down prices, but the fuel’s dominance is posing challenges

in january 2011, extremely cold temperatures enveloped New England, and demand for natural gas soared. Why does demand for natural gas matter to ISO New England, which operates the regional electricity grid and manages the wholesale electricity markets? Because natural gas has become the dominant fuel used to generate electricity in our region. The story of what happened on January 24, 2011—which was not an isolated occurrence—helps illustrate why our reliance on natural gas is of critical importance.

 

As the cold snap moved into its second week, demand for natural gas to heat homes and businesses was rising. The extreme cold caused operational problems at some major natural gas-fired generators, and others without contracts for guaranteed fuel delivery found themselves unable to get gas. By the morning of January 24, ISO New England’s control room operators faced extremely tight system conditions: electricity demand was near an all-time winter high, and several power plants were having trouble delivering.

The ISO initiated several emergency procedures to keep the power flowing, cancelling all routine transmission work, verifying that natural gas-fired generators had secured the fuel they needed to produce electricity, and curtailing electricity sales to neighboring areas. And with projections that demand would peak on Monday, January 24, system operators called for the region’s older, oil-fired generators to start up over the weekend—because these older plants can take 12 to 24 hours to ramp up to full production.

This spring, on March 2, system operators faced a similar set of challenging circumstances. Trans­mission lines in Rhode Island and southeast Massa­chusetts were out for planned maintenance, and natural gas-fired generators in the area were called on to support reliability. But an unplanned transmission outage occurred at the same time two natural gas pipelines serving those local plants began experiencing problems. To protect reliability, system operators called upon other generators, elsewhere in the region, which were able to procure the fuel they needed.

Two important themes emerge from these examples. First, when winter demand for electricity peaks in New England, demand for natural gas—both for power generation and to heat homes and businesses—is also peaking. Electric generators often do not have firm gas supply contracts and therefore can only get delivery of gas if there is space on the pipeline. Even at other times of the year, some of the region’s natural gas-fired generators may be unable to get fuel if there is an outage or constraint on a pipeline.

Second, at times of system stress—which can occur in any season—or when power plants are unable to secure natural gas, electricity production from the region’s older oil- and coal-fired power plants is currently essential. Yet many of these older plants could opt for retirement in the near future due to market pressures and the cost of complying with environmental regulations. If coal and oil plants retire, they are likely to be replaced by more natural gas power plants.

This reliance on natural gas to produce electricity marks a relatively recent shift in the region’s power plant fleet. Since 1999, more than 13,000 megawatts (MW) of new generation have been built, with most of that natural gas-fired. In 2000, oil produced 22 percent of the region’s electricity; last year, oil plants generated less than 1 percent. At the same time, the share of electricity produced by natural gas went from 15 percent to 52 percent.

The region’s reliance on natural gas is only likely to grow as abundant new supplies, low prices, and stronger environmental regulations converge to favor continued investment in gas-powered resources. Gas plants operate efficiently, emit relatively few pollutants, and help meet regional environmental goals.

Another important development is underway a few hundred miles away in the hills of Pennsylvania and western New York. An enormous deposit of natural gas—the Mar­cellus shale—has resulted in record levels of domestic natural gas production. After decades of living “at the end of the pipe­line” that brought most of the region’s natural gas from the Gulf of Mexico, New England is suddenly next door to a major source of energy, although expansion of natural gas pipeline infrastructure is needed between the regions.

The region’s reliance on natural gas has continued to grow, but with the lessons learned from several power system events, the ISO has developed improved operating procedures to deal with the possibility that natural gas-fired generators may be unable to obtain fuel. The electricity and natural gas industries in New England have significantly improved their coordination and communications to help maintain their vital services.

Natural gas is powering the region and, as a result, the price of wholesale electricity now follows the price of natural gas here. With the significant increase in domestic production, natural gas prices have plummeted. Whole­sale electricity prices also have fallen. As a result, many utilities across New England have announced rate cuts for their electricity customers.

It’s evident that generating electricity with natural gas has its benefits. But becoming heavily re­liant on just one fuel poses challenges to the long-term stability of the power system.

The transition to lower-priced gas has pushed the older, fossil-fuel-fired generators in­to tenuous financial territory. Nearly one-quarter of New Eng­land’s generation capacity is provided by oil and coal plants that are more than 30 years old. Because natural gas plants have become far less expensive to operate, these oil and coal units have gone from market-makers to bench players, running just a few times a year when demand is peaking or to fill in for generators that are out of service. In addition, new federal environmental regulations could require additional capital expenditures to retrofit these units with pollution control equipment.

The changing economics of the electric and gas industries could also affect the development of renewable power. While wind power accounts for less than 2 percent of the total power mix, current proposals would increase the amount of wind power by a factor of five. By 2020, the six New England states are aiming for renewables and energy efficiency to make up 30 percent of total supply. But as the price of natural gas has fallen, the financial outlook for wind power development has become less clear.

The region’s reliance on natural gas and the consequences of fossil fuel-fired generator retirements are among several interconnected challenges being addressed through a Strategic Planning Initiative launched more than a year ago by ISO New England, market participants, regulators, and other government officials from all six New England states. The goal is to assess these challenges and find solutions that will lay the groundwork for a power system that continues to be reliable and economically efficient.

The initiative is paying particular attention to the natural gas issue because of its near- and long-term implications for system reliability. A comprehensive study of the region’s natural gas pipeline capacity and its ability to meet power generation needs was completed last year.

The initial results indicate that under normal system conditions during summer peak demand, no shortfall in the ability to deliver natural gas for power generation is expected. On a winter peak day, with all pipelines and liquefied natural gas (LNG) imports available and demand at normal levels, the natural gas system in New England can meet power system demand from 2014 to 2017.

While the study focused on winter peaks, the ISO’s experience shows problems can surface year-round. Temp­era­tures—and demand—in New England can hit extremes, and equipment can break down. The study found that if winter demand is particularly high, current pipeline capacity won’t be sufficient to transport gas for both heating and electric generation needs. If pipeline disruptions occur, or if gas demand rises because retiring oil and coal power plants are replaced by natural gas plants, the pipeline deficit worsens.

Furthermore, the assumption that LNG imports will remain at historical levels is proving to be incorrect. In the global marketplace, LNG has recently been able to command prices that are four to eight times the US price. The study will be revised with an assumption that LNG imports will be lower, with the likely result that the pipe­line deficit will be greater than forecast.

While reliability can be maintained in the near term with existing tools and better utilization of existing power system infrastructure, these are not long-term solutions to the challenges. The Strategic Planning Initiative has begun to outline potential solutions, many of which are ambitious, complex, and will take years to implement; others may be more easily instituted in the short term to begin mitigating these risks. Potential solutions include:

  • Alignment of the wholesale electric market and gas market timelines, so power plants will know if they’ve been scheduled to run before the deadline to buy natural gas.
  • Allowing generators to update their offers in the energy market to reflect real-time changes in fuel prices.
  • Increasing the performance incentives for generators to deliver electricity and the consequences for failure to deliver energy.
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Other interim solutions, such as ensuring power plants have sufficient fuel levels, may be necessary as we work to implement long-term solutions to the region’s fuel security needs. Looking ahead, the one certainty is that days like January 24, 2011, will come around again until the region has fully addressed its reliance on natural gas for electricity generation.  

Gordon van Welie is president and CEO of ISO New England Inc.