FERC warns possible gas, power price volatility during California winter

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While energy markets are well-positioned to address potential challenges this coming winter, the increased use of solar power in California and the demand imposed on the natural gas delivery system could lead to volatile energy prices, FERC staff said in a presentation at the commission’s Oct. 15 meeting.

That potential comes at a time when spot and futures prices for gas and power are well below levels from one year ago, with gas futures prices more than 30 percent lower at the Henry Hub, Southern California border, Mid-Atlantic and New England regions, FERC staff said.

Futures prices in the power sector are down 51 percent from last year at the Massachusetts hub, 30 percent lower at the PJM Interconnection Western hub and 34 percent lower at the Mid-Columbia hub in the Northwest, staff added. “Traders are likely recognizing the ample supply of natural gas expected for the coming winter as well as the expanded natural gas pipeline delivery system,” said staff from FERC’s Office of Enforcement.

With gas storage inventories approaching 4 Tcf, which would be a record level, increased production despite lower rig counts and pipeline expansions as well as reversed flows on some pipelines, gas deliverability is improved compared with last year, although no pipeline capacity additions have been made in New England, FERC staff said.

Commissioner Cheryl LaFleur noted that ISO New England has mentioned concerns about the Deep Panuke natural gas facility offshore Nova Scotia and reduced output, with those concerns only exacerbated by coal and nuclear plant retirements planned in the region.

FERC staff said Deep Panuke owner Encana has said water intrusion and hydrate formation caused problems with the facility and caused it to only be used during the winter. While the project is expected to be operating during the winter, the output level is uncertain, staff told LaFleur.

The uncertainty of winter weather, possible increased gas demand in New England and the limited gas pipeline capacity could produce volatile prices in the region, FERC staff said.

The gas delivery challenges may not be limited to New England, as Southern California Gas (SoCal Gas) has experienced low pressures on its distribution system when gas demand has ramped up in the evenings and solar generation output dropped, FERC staff noted. Cloudy skies, which are common during winter, reduce solar generation output and increase gas use for generation, and SoCal Gas in the past has notified the California ISO (Cal-ISO) that it could not meet all power plants’ demand due to maintenance on the gas utility system and record dispatch for gas-fired generation, staff said at the meeting.

With the approval of state regulators, SoCal Gas now has a low operational flow order (OFO) program in place to help address periods of high gas demand and low pressures on its system, but “it is unclear whether the OFO will be operable this winter,” FERC staff said.

The issue can be traced to the addition of renewable resources, including nearly 7,000 MW of utility-scale solar capacity and behind-the-meter solar resources estimated at 3,000 MW in California, which presents a challenge in the winter when the sun sets well before the evening peak demand for electricity or amid cloudy conditions, FERC staff said. The winter evening ramp over a three-hour period could be the highest ever on the Cal-ISO system this winter, which requires plenty of generators to be online and available as needed. “Renewable generation remains insensitive to market prices and is not dispatchable in [Cal-ISO. Together, the need for gas-fired generation and the lack of dispatchable renewable generation increases the likelihood of price volatility and possible over or under generation conditions,” staff said.

Commissioner Philip Moeller pointed out that California has promoted renewable resources and said a logical conclusion from the experience thus far is that “you need some gas plants to back them up.” The need for infrastructure on both the gas and power side is clear under such conditions, Moeller said.

The number of coal-fired generation retirements in the PJM Interconnection (PJM) region has been closely watched, and Moeller questioned staff about any concerns heading into winter. New gas-fired plants are being added, and some transmission projects have helped relieve stress on the grid in areas where plants have retired, staff said, mentioning similar comments from Michael Kormos, executive vice president at PJM, in September.

In comments to the FERC commissioners on Sept. 17, various representatives from independent system operators provided updates on winter preparations, and Kormos said the transmission expansions and about 3,000 MW of new gas-fired capacity have helped mitigate the coal plant retirements.

ISOs have improved their coordination with the natural gas industry and their understanding of gas market dynamics, FERC staff told the commissioners. Fuel inventory surveys have become normal, allowing grid operators to better realize and prepare for any fuel concerns before winter beings, staff  said, noting that coal deliveries have improved at many power plants in the Midwest compared with reduced stockpiles heading into the winter of 2014-15.

In other parts of the country, winter forecasts call for cooler-than-normal temperatures in the South and moderate weather in the Midwest, Pacific Northwest and the Northeast, according to the FERC staff presentation. The National Oceanic and Atmospheric Administration expects warmer-than-normal winter temperatures for most Northern states, with relatively wet and stormy weather for much of the Southern half of the country. NOAA predicts an equal chance for cold or warm weather in the Mid-Atlantic, Midcontinent and Southwest, while some analysts using that data are predicting the coming winter to be 7 percent warmer than last winter and 3 percent warmer than the 30-year average, FERC staff said.

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