ELECTRICITY:

Deep freeze exposes challenges for gas-dependent grid operator

This story was updated at 1:26 p.m. EST.

Energy markets were roiled yesterday when the cost of producing electricity in the gas-rich Midwest and mid-Atlantic soared above $1,000 per megawatt-hour for the first time as arctic temperatures squeezed the East Coast.

The PJM Interconnection -- the grid operator in the heart of the region experiencing the Marcellus Shale boom -- blamed escalating natural gas prices in a notice obtained by Greenwire.

At issue were spot prices for gas in the mid-Atlantic that surged almost 340 percent to $45 per million British thermal units, while prices in New York City rose more than 780 percent to $120.75 per MMBtu, according to the federal Energy Information Administration. Electricity prices in PJM West, representative of the mid-Atlantic region, reached $857.39 per MWh yesterday by 7 p.m., which normally marks the end of the peak hour.

In an effort to keep power plants online, PJM also took the rare step of allowing market participants to sell electricity for more than $1,000 per MWh and surpass a "cap," and it proposed to reimburse power plants that didn't qualify for such special treatment. PJM told its members that it would "as soon as practical" ask the Federal Energy Regulatory Commission for a retroactive waiver of its $1,000-per-MWh system offer cap rule through March 1 so that generators could be reimbursed for costs above the cap.

But Joseph Bowring, president of Monitoring Analytics and the independent market monitor for PJM, warned that such payments could be "nontransparent" and said it was more reasonable for cost-based offers, subject to market monitor approval, to set prices in PJM's markets.

The price spikes ultimately sparked questions about forecasting, constraints and energy supply in the pipeline-laden mid-Atlantic -- and concerns about a deep freeze that's likely to stick around. PJM today repeated a step it took during the polar temperature blast that began Jan. 7, and asked power customers to conserve electricity.

"It's the behavior of pipelines on days like this that's core to the whole issue of [gas-electric] coordination," an energy market source said. "It's not really clear what the pipelines are doing. It's supposed to be very cold for the next week, so things are going to get more interesting."

Sources said challenges in PJM -- normally associated with New England's gas-constricted markets -- reflect a larger national reliance on gas for power generation that runs up against peak heating demand for homes and businesses during winter months. Complicating the picture was the outage of two reactors at the Calvert Cliffs nuclear power plant near Lusby, Md., due to malfunctioning electrical equipment.

Many sources pointed to a scramble for gas set off when supplies run short for units with contracts that allow for interruptions.

"The issue is there's a transportation constraint, not a lack of gas supply," said Frank Brock, a senior energy market specialist at ICF International. "Constraints on the ability to move gas in upstream gas-rich areas like the Marcellus, mainly Pennsylvania, to market areas like New York, New Jersey, Boston and New England."

Still, questions remain.

FERC Commissioner Philip Moeller yesterday, in a conversation with E&E reporters, noted that the system is being strained and that the onslaught of arctic temperatures is also preceded by two mild winters. It could take up to six months to analyze what happened during the cold snap that hit PJM the first week of January -- and the outcome could shine a light on whether forecasting grid stressors and system demands needs to be extended beyond 30 years, he said.

"Perhaps we need to be a little more inclusive of a larger time frame because it's clear that gas is the winner going forward for the foreseeable future for new generation," he said. "And yet the financing model of pipelines basically built on a firm customer base at [load serving entities], and its new customer base of somewhat interruptible supplies means that we have to rethink whether existing approaches actually work."

'It's all kind of messed up'

The focus of regulators for the past two years has squarely been on New England, dubbed "the canary in the mine shaft" when it comes to debates over how to align the natural gas and electric power systems.

The region's gas-fired generation has grown amid limited pipeline and storage capacity, sparking debates between the two sectors over who will pay for new infrastructure.

On one side, pipelines are requesting long-term gas purchase commitments before building new infrastructure. Merchant power plants, on the other hand, insist they can't make those commitments because they are called on to operate day by day.

Experts say the market dynamics are complex. Power market economist James Wilson said there is the potential for local, short-lived gas price spikes, and the picture becomes even more interesting when the electric sector is thrown in.

"The whole system gets rather uncompetitive for those brief moments, and there's a lot of weird incentives going on -- good ones and bad ones in terms of not buying or buying what you should or shouldn't -- it's all kind of messed up," Wilson said. "When you get the electric sector in there, things get more complicated. There are some electricity market participants who have large portfolios, so they're not necessarily averse to electricity prices going very high."

It's unclear whether those dynamics are surfacing in PJM, where 80 to 90 percent of the region's gas-fired generation depends on non-firm contracts for gas -- meaning supplies can be interrupted, according to the North American Electric Reliability Corp.'s 2013 "Winter Reliability Assessment." PJM has established a Gas-Electric Senior Task Force to explore and identify such gas-electric issues.

Case in point is a high point during the last day of the polar vortex on Jan. 8, when gas-curtailed generation reached about 9,000 MW. Those units -- a subset of total outages that ranged from 39,520 MW in the morning to 27,044 MW that evening -- did not receive their gas supply in order to run, according to PJM.

Paula DuPont-Kidd, a spokeswoman for the grid operator, said the majority of the 9,000 MW of outages "were related to units having interruptible gas transportation contracts that were interrupted because of the high demand from customers with firm transportation contracts -- generally heating load."

But again, questions remain.

Craig Glazer, PJM's vice president of federal government policy, noted there is a "vibrant secondary market for firm gas" and it's not clear the outages were tied to contract issues. Glazer also said during an interview that some plants without firm contracts did in fact get gas.

Glazer also pointed out that curtailments due to gas did not make up the bulk of problems that day. At that time, more than 14,000 MW of steam and fossil plants were offline. Federal regulators will now investigate what role extreme weather, equipment malfunctions, freezing coal piles and well heads may have played in those outages.

"We never said we couldn't be subject to gas curtailments, but given the size of the fleet, the variability of demand response and other things that happened, we were able to manage," Glazer said.

Facing 'political and social questions'

Howard Gruenspecht, deputy administrator at the Energy Information Administration, said participants in a number of energy markets are forced to choose between paying more on average to protect against rare situations or paying more when extreme situations hit.

"Everyone," he said, "wants to pay standby fares and fly first class."

Gruenspecht said those are the "sort of political and social questions" in energy markets that agencies like FERC have to tackle.

"Miller Lite, you know, tastes great and is less filling," he said. "In some of these decisions that have to be made, you may have to choose between tastes great and less filling."

Glazer said the challenges highlight the importance of PJM's participation in the federally funded Eastern Interconnection Planning Collaborative's Gas-Electric System Interface Study, which is likely to shine a light on the challenge of synchronizing the gas and electric systems.

Boston-based engineering firm Levitan & Associates Inc. is heading up the research project as part of the Obama administration's larger effort to gauge the gas industry's reaction during the next decade to an uptick in renewables and gas for electricity, and the closure of coal plants.

Kelly Speakes-Backman, a member of the Maryland Public Service Commission, agreed with Moeller that a 30-year outlook may not be sufficient enough to take account of these 100-year storms, and that there are changing dynamics among customers and state and federal regulators as the national fuel mix changes. "I would love to see an accelerated pace of this analysis," she said during a round-table discussion with E&E.

Moeller said it's ultimately FERC's responsibility -- as regulator of the organized markets -- to address any situation that could threaten reliability, and that's why the agency held regional technical conferences on the long-standing issue. Moeller said he's also encouraged FERC's work pace on the issue has picked up and led to a universal recognition that these issues could affect any region.

"It's been a long journey," Moeller said.

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