Regional system operators focus their planning around natural gas

Regional electricity-system operators in the United States will need to rethink market planning and rules as they become more dependent on natural gas to ensure power-capacity reliability, according to speakers at FC Gas Intelligence’s recent Natural Gas to Power Generation Summit.

Regional-transmission organizations are increasingly relying on natural-gas plants for electricity (Image credit: Panda Power)

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Low natural-gas prices will ensure this fuel source is the primary option to replace retired coal-generation capacity, as government rules push for more renewables and less polluting power plants, a system operator and an analyst said at the Philadelphia conference.

Changes in the power-generation mix in recent years have prompted Midcontinent Independent System Operator (MISO) to reevaluate its market planning models and take a closer look at the interactions between the natural gas and electric industries.

“Because of the major changes in the electric industry, there are some things we might need to reconsider: we need to better understand whether that fuel is going to be available, and whether there is going to be pipeline capacity available,” said Tessa Haagenson, Policy Studies Engineer at MISO.

Change of direction

MISO decided to adopt new tools to add more information about the natural-gas market in its operations-planning models, including data on transportation network, fuel prices across different regions, pipeline availability, and natural-gas demand. Before the changes, MISO planning models would simply assume fuel availability.

“This can help to inform us on potential infrastructure needs going forward and potential congestion on the natural-gas pipeline system, so that when we cite new resources in our models and guess at where new gas generators might be built we can be better informed on how that’s going to impact electricity prices, as well as transmission system and natural-gas system operations,” she said.

MISO is the largest regional transmission organization or independent system organization by geographic area in the US, managing the transmission system and energy market in all or part of 15 midwestern and southern states and in the Canadian province of Manitoba.

Total energy supply coming from natural gas in MISO’s system is expected to account for 35% of the total generation matrix by 2030, in comparison with 27% currently, according to the operator’s projections.

Gas is expanding its market share in MISO and other regions (Image credit: MISO)

Coal-power generation will drop from 51% to 36% of total electricity generation, as approximately 10 gigawatts (GW) of coal capacity retires due to the Mercury and Air Toxics Standards. Implementation of Clean Power Plan standards could lead to an additional 8 to 24 GW of coal capacity retirements.

Price and access challenges

Ensuring energy prices are covering costs and attracting natural-gas power capacity is one of the challenges some US regional operators still have to address, said Adil Sener, head of Power Market Analytics at investment bank Jefferies LLC.

Markets located in the northeast, such as PJM Interconnection, ISO New England and New York ISO, have implemented major capacity market reforms and made progress in pricing the true cost of merchant capacity, according to Sener. However, he believes California ISO, Texas’ ERCOT, and MISO still lag behind and are likely to face mass retirements of coal and nuclear power plants.

Some areas in California managed by CAISO are failing to price energy capacity prices correctly in order to incentivize thermal-power generation. Sener said a large portion of existing merchant capacity in some key load zones is being paid too little for reliable performance.

“What I expect is, in five to 10 years, with this kind of (payments), we will see a major re-contracting surge in key load buckets in California, simply because the market design does not really incentivize new (plants), and the spark spreads are terrible, it is close to $1 per megawatt hour,” he said.

In the ERCOT region, energy scarcity prices are projected to fall to half of the historical levels for the area, while the region’s energy demand keeps growing faster than other areas. In the northern part of the ERCOT region, capacity prices based on the scarcity prices are at $1.50 per kW-month, while the net cost for new entries is around $7.90/kW-month.

“There is a huge disconnect between the market design, the historical scarcity prices and the future expectations,” said Sener.

Even regions where capacity prices are better covering costs of new power plant entries, such as the system operated by PJM, face challenges related to transmission constraints that might prevent some of the combined-cycle power plants being built. This region’s location on the Marcellus and Utica shale-gas production areas is attracting dozens of new natural gas electric projects.

“There is a huge amount of combined-cycles coming into Pennsylvania and Ohio, trying to take advantage of gas arbitrage. The question is: what is the saturation point?” Sener said. “There are some transmission issues that need to be addressed before we actually build all of these combined-cycles.”

About 15 GW of combined-cycle projects located in and around the Marcellus production zone are in different stages of development, bringing significant impact on transmission dynamics, according to Sener.

By Anna Flávia Rochas