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Natural Gas: Are Changes Needed in the Gas Industry to Reliably Serve the Electric Industry?

by Bob Shively, Enerdynamics President and Lead Instructor

The natural gas industry is on a long run of increasing sales to electric generators. Beginning with a wave of gas combined-cycle power plants built in the mid-1990s, gas usage by electric generators has doubled since 1997. 

 

 

 

In 2009 electric generation surpassed the industrial sector to become the largest gas customer segment. And the trend is likely to continue; the Energy Information Administration (EIA) forecasts that gas generation will make up nearly 60% of the new generation brought online in the next five years.[1]     

 

Decisions by generators involve both industries

But as growth continues, differences between how the electric and gas industries operate are becoming apparent and may become problematic if not addressed. Enerdynamics recently presented a one-day Gas Markets Fundamentals seminar to PJM stakeholders concerned with issues that arose during the Polar Vortex (a weather event in January 2014 when extreme cold blanketed the Mid-Atlantic, Northeast, and Midwest states). 

 

As reiterated in the seminar, generators must make multiple decisions to obtain gas supply. These include:

  • Structure of supply purchase agreements
  • Structure of transportation agreements
  • Whether or not to use storage, and, if so, structure of storage agreements
  • Whether or not to use financial risk management products

Some generators that are part of large organizations may have the wherewithal to handle arrangements internally. But more commonly, generators depend on gas marketers or asset aggregators to handle gas arrangements. The result of gas supply decisions impact the price a generator pays and can even determine if gas supply is available during extreme conditions.

 

 

Gas and electric industry disparities exist

These issues came to a head during and after the so-called Polar Vortex. Demand for heating gas shot up at the same time that electric systems dispatched gas-fired generation to meet rising electric demand. The result was skyrocketing gas prices that reached $120/MMBtu in some markets. In a few instances gas units were unable to run due to unavailability of gas supply.[2]

 


      Source: EIA website

 

Gas generators and system operators attempting to dispatch gas generators discovered a number of disparities between the two industries’ business practices — disparities that at times caused difficulties. These include:

  • Pipelines and gas storage facilities are sized to fulfill firm contracts, not to meet projected loads. There is no centralized reliability planner for the gas system except at the local distribution company (LDC) level. So if generators don’t sign up for firm capacity on pipelines and/or storage, there may be no capacity available to serve their needs when everyone else is using the system.

  • Most gas business practices assume daily nominations with uniform hourly demand across the day. This is very different than electric scheduling, which is done hourly and even every five minutes during real-time scheduling. During most times this isn’t an issue as pipelines and LDCs have the flexibility to let generators take varying amounts of gas during the day. But during extreme conditions pipelines and LDCs may enforce tariff provisions that penalize customers for failing to take equal amounts each hour.

  • The gas scheduling day runs from 9 a.m. to 9 a.m. Central Time while the electric day runs from midnight to midnight. This results in generators needing to place gas nominations prior to knowing whether their units will be dispatched by the system operator.

  • The standard times for adjusting gas schedules during the operating day do not match well with typical times that electric system operators are ramping units to meet growing demand on their system.

  • Gas markets traditionally are open for trading only during the week, with weekend arrangements set up on Friday and treated as a two-day block.  This can clash with electric markets that function 24/7. 

  • LDC tariff rules and system design practices are structured around the concept that large customers such as electric generators and industrial customers will be curtailed on peak demand days. This means that, on peak cold days when electric system operators are needing more supply to prevent electric shortages, LDCs may be preparing to curtail gas deliveries to any generators taking service off the LDC system.[3]

What's next?

To deal with some of the scheduling issues, the Federal Energy Regulatory Commission (FERC) is attempting to work with the two industries to change gas rules.[4] But this is proving problematic as different stakeholders have very different viewpoints on what, if anything, should be done.[5]

 

Other issues must be handled through changes in contracting practices between gas market participants (including producers, marketers, pipelines, storage facilities, and LDCs) and electric generators. Many gas marketers as well as some pipelines and LDCs have expressed their desire to work with the electric industry to design new products that meet generators’ and system operators’ needs. If this can be managed in competitive business arrangements rather than through new regulatory rules, it is likely a win-win for all.

 

Want to learn more about coordination between the gas and electric industries? Enerdynamics can provide a customized seminar for your organization that will teach your employees what they need to know about this critical issue. Contact us at info@enerdynamics.com or 866-765-5432.

 

 

References:

[1] See http://www.eia.gov/electricity/annual/html/epa_04_05.html

[2] For a discussion of the issues on the PJM system, see http://www.ferc.gov/CalendarFiles/20140401084122-Kormos,%20PJM.pdf

[3] This can be a significant issue — for instance in PJM 49% of gas-fired generation is served off LDC systems.

[4] See http://www.ferc.gov/media/news-releases/2014/2014-1/03-20-14-M-1.asp#.U6SzJvldV8E

[5] See http://www.ferc.gov/legal/staff-reports/2014/06-19-14-gas-electric-cord-quarterly.pdf

 

 

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