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Natural Gas and Electricity – Reluctant Partners

January 22nd, 2014

OMAHA (Capstone Energy Services) – The Federal Energy Regulatory Commission (FERC) plans for 2014 include addressing some of the problems that exist in the interrelationship of the natural gas and electric industries. Natural gas has become the fuel of choice for new electric generation capacity, as environmental considerations require utilities to abandon old coal plants in favor of new natural gas plants. In addition, the rapid increase in renewable energy sources, specifically wind and solar, require back up generation sources for periods without sun or wind. These back up plants will also primarily use natural gas. The increase in natural gas generation has identified a number of operational problems that need to be addressed. Gas and electricity costs in the northeast this winter emphasize the importance of addressing these problems. Spot natural gas prices for deliveries both to New York and Boston, spike to as high as $100 per MMbtu, which led to a spike in electricity. Some day-ahead prices were $200 to over $300 per MWh, five to ten times the normal price. FERC has already begun to address the problem, which will most likely lead to some fundamental changes in the operational structure of both industries.

FERC Order 787 that became effective on December 23, 2013 authorized non-public operational information sharing between interstate natural gas pipelines and electric transmission operators “to promote the reliability and integrity of their systems.” This confidential information includes real time flow/demand information as well as actual or anticipated restrictions and interruptions. This Order is the first of a number of rulemakings expected to have a significant effect on the interrelationship between the two industries. The ongoing transformation of electric power generation away from coal toward natural gas will require a greater interrelationship between the industries. However, the issues are significant and complex.

Probably the most obvious difference between the two industries is the delivery schedule. The natural gas industry operates on a gas day from 9:00 AM to 9:00 AM. Deliveries are expected to be ratable throughout the gas day with a limited number of opportunities to changes delivery volumes throughout the day. In contrast, the electric power industry operates on a calendar day in real time, adjusting generation up or down as required to match fluctuations in demand and to maintain system voltage. A generation facility fueled by natural gas may be required to increase or decrease electricity deliveries at any time with the resulting change in the natural gas supply requirements. FERC Order 787 provides a communication mechanism that will assist in reconciling these operating differences, but further integration of the operations will probably require some difficult fundamental changes.

A second major problem will be pipeline capacity. New or expanded capacity on a pipeline requires advance commitment by specific shippers to purchase and pay for the capacity for a sufficient amount of time to justify the project. The vast majority of the cost commitment is fixed, meaning a shipper who fails to utilize the capacity, either directly or through capacity release, is still liable for the monthly fixed costs. Generators whose operating parameters are uncertain, particularly those that are required primarily for peak periods of demand cannot economically justify purchasing capacity, yet they need the firm gas supply in order to respond to electric system demand and maintain its integrity.

FERC has already indicated that the Northeast will be the priority. A majority of the region’s electricity requirement is now served by natural gas and that percentage is increasing. Natural gas capacity is clearly deficient there as demonstrated by the very high prices being experienced there this winter. The New England Governors met in December and agreed to work cooperatively to address this problem, and FERC will likely use the problems to be addressed in the Northeast as the basis for some fundamental operational reforms in both the natural gas and electric industries beginning in 2014.

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By Ed Freeman

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Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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Energy & the Environment

Energy & the Environment

How we assist clients in responding to national environmental concerns.

  • Initiate and manage a "Green" energy procurement program
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  • Research state and local energy efficiency programs and incentives
  • Track energy use and related emissions estimate